I25th SUERF Colloquium

New Challenges for European Banks

Almost 200 experts gathered for SUERF’s recent conference on the financial services sector, held at the Madrid campus.

“European banks are still trailing behind banks in the United States. They have lower net interest margins, lower returns on equity, and higher cost/income ratios. There is, therefore, a need for strategic re-invention or renewal of banking management in Europe, to achieve corporate growth and improve organization and governance,” said IESE Dean Jordi Canals, who opened the 25th SUERF Colloquium organized by IESE Business School in association with the Bank of Spain.

Addressing nearly 200 experts gathered for three days at IESE’s Madrid campus to present the latest research on “Competition and Profitability in European Financial Services,” Dean Canals offered this challenge: “Are European bank boards ready to meet governance challenges? Do they understand competitive risks, markets of derivatives, and do they deal with conflicts of interest in an appropriate way?”

SUERF is an international organization supported by central banks and financial institutions, whos aim is to promote research and exchange ideas and experiences within the area of finance. SUERF regularly organizes forums, conferences and debates, the principal one being the annual colloquium, which brings together academics and directors from the public and private sectors to share trends and developments.

Like Dean Canals, Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, also compared the financial services offered in the U.S. and Europe when he spoke on “The Changing Pattern of Payments in the United States.” He noted that Europeans use cash roughly twice as often as Americans, with half of all non-cash retail payments made through a Giro system and only about 15 percent by check – which is almost exactly the reverse of the situation in the U.S.

However, Santomero expects retail payments in the U.S. to continue moving away from paper checks toward electronic instruments, including credit cards, debit cards, the Automated Clearing House (similar to Giro) and emerging vehicles such as prepaid cards. He predicted that organizations other than banks would expand their role in the payments system, especially retailers themselves, and competition among card providers would be keen.

The U.S. Fed, he added, is committed to working to improve the reliability and efficiency of the current generation of payment vehicles. At the same time, the central bank works to foster innovation and to support the next generation of payment vehicles. The Fed is investing heavily in technologies that enable electronification, he said.

With the U.S. payment system and the European model moving towards convergence, all trends point to the U.S. and Europe looking more alike in the future. However, the two continents will get there from very different starting points, Santomero concluded.

Another keynote speaker, Malcolm D. Knight, general manager of the Bank for International Settlements of Basel, spoke on “Markets and Institutions: Managing the Evolving Financial Risk.” Inspired by the Asian financial crisis in the 1990s, the “Basel II” framework was developed to create more efficient risk transfer mechanisms, which have changed dramatically over the past 30 years under the influence of liberalization, new technology and innovation.

However, the introduction of new mechanisms to manage risk does not remove the risk itself, said Knight, but rather transfers it to somebody else or spreads it among various parties. It is essential, therefore, for market participants to have the capability and awareness to determine risk, and only incur sustainable risks. If not monitored properly, imbalances can build up over time.

To deal with this, Knight recommended the use of stress-testing. Bank managers should look at how different possible scenarios may affect market prices and banks' exposures. Violation of risk-limits should cause less mechanical reactions than before. Supervisors should, according to Knight, make sure policies are consistent across sectors, strengthen the macro-prudential orientation of supervision, ensure that market participants have incentives to improve their risk-management methods, and support standardization of financial reporting by means of international accounting standards. Reporting should not only measure profitability and capital, but also adequately describe banks’ risk profiles.

Knight called on those present for more research across different academic areas on the nature of risk. “The policymakers are looking for your advice,” he said.

During the course of the colloquium, the participants split up into three separate commissions. One commission focused on “Trends in Competition and Profitability,” looking at efficiency evolution, comparisons and impact on profitability; competition, market power and transmission of cost shocks into prices; and market structure, concentration, value creation and competition. A second commission on “Competitive Strategies” included a Bankers’ Panel, with four representatives of banks belonging to the top 15 banks in Europe. The third commission considered “Macro-policy and Financial Stability Implications” from four angles: the scope of the changes experienced in the financial industry over the past few years; the implications for the macro-economy, in particular the monetary transmission mechanism; the implications for financial stability; and the implications for monetary and supervisory policies.

Representing IESE at the colloquium were professors Jordi Gual and José Manuel Campa, professor of finance and director of research, along with Dean Canals. Representing the Bank of Spain – the joint organizers of the colloquium – were bank governor Jaime Caruana and Fernando Restoy, director of monetary and financial studies.

Other participants included: David T. Llewellyn, president of SUERF and professor of money and banking at Loughborough University; Guillermo de la Dehesa, vice-chairman of Goldman Sachs Europe and chairman of CEPR; Frank Lierman, chief economist of Dexia Bank Belgium; Morten Balling, professor at Aarhus School of Business; Ryszard Kokoszcynski, director of the Bureau of Macroeconomic Research at the National Bank of Poland; and Josef Christl, executive director of the Oesterreichische Nationalbank.

Also at the event, Michael Koetter, of the Utrecht School of Economics in the Netherlands, was presented with the Marjolin Prize – awarded for the best contribution by a person under 40 – for his paper on “Bank Efficiency and Mis-specified Input Prices.”