Delivering the opening speech in Frankfurt to several hundred leading representatives from the European financial services sector at the 18th annual Handelsblatt Conference, the Co-Chief Executive Officer discussed the transition facing the banking industry, reflecting on the conference theme, “Banken im Umbruch” (Banks in Transition).
“The banking industry is at an inflexion point,” Jain said. Since 2008, banks worldwide have been through a period of great change, much of it voluntary, he noted. Capital and reserves have been strengthened, leverage reduced, business models narrowed, and compensation practices changed.
Despite this, the industry still faces a unique combination of challenges. The quantum of regulation has increased, and rightfully so; but regulation has also become fragmented across different regimes. Litigation costs have also increased substantially and will continue to affect the industry. Most significantly, trust in the banking industry is at an all-time low. “The confluence of all these factors will transform the economics of banking,” Jain explained.
The global economy is also in transition, and this will bring challenges, Jain observed. Globalisation has been called into question, despite its benefits. Fragmented bank regulation restricts the free movement of capital across the world, posing a challenge for banks. Europe suffers a competitive disadvantage to the US, and the faster pace of US economic recovery will favour banks with substantial US footprints.
Opportunities also exist, said Jain. European bank consolidation enables banks with strong brands and solid capital bases to gain market share. Emerging market growth, driven by massive urbanisation, will see the middle classes in these countries grow to some 3 billion people. Many of them will become bank customers for the first time. The ageing of the world population will also provide significant opportunities for banks to help societies adapt to these shifting demographic patterns. Major opportunities will arise from the way technology has revolutionised the world’s financial markets; for example, ‘big data’ can transform banks’ understanding of their customers.
This period of transition will shape the banking industry of the future, Jain said. “Pre-crisis, many banks offered many services to many people. Now, focus and scale will be all-important. The industry will coalesce around three distinct models.”
Regionally-focused banks will be spared the challenges of rising complexity, Jain observed. He complemented Germany’s regional banks on their cost management at a time of low interest rates.
Global monoline banks, such as pure-play transaction banks, investment banks or asset managers, will combine the advantages of business focus and global scale; however, they lack diversification and are exposed to the risks of a single business.
Turning to the global universal banking model, Jain observed: “Global universal banks offer many advantages and are well-positioned to capture some of the opportunities of a world in transition. However, before we can do that, a lot of hard work lies ahead.
“Global universal banks must respond to three critical challenges: providing a solution to the ‘too big to fail’ question; restoring the bond of trust with society; and becoming more efficient. If we achieve these, the dividend is enormous,” he explained.
Jain concluded by outlining the benefits of global universal banks for Germany. “Germany is a winner from globalisation,” he observed. “Germany’s globalised economy needs and deserves a global bank. To be global, a certain minimum scale is essential. It’s difficult to be global and small,” he noted.
Germany is also unique in its Mittelstand - companies which are locally-based across the German heartland, but globally active. Accessing an integrated set of global banking services through a single, local ‘gateway’ is often critical for these clients.
Furthermore, Jain noted, bank credit is highly important for the German economy. A global universal bank, with a highly diversified balance sheet and funding base, can provide credit in the right quantities and at a reasonable cost.
A global universal bank based in Germany has additional advantages for German business, Jain said. “We possess both global reach and a national network of branches – in other words we are both as global and as local as our Mittelstand clients.” Additionally, in a world of fragmented regulation, foreign banks acting in Germany may potentially come under pressure to repatriate capital to their home markets at times of stress.
“Simply put: no other German bank is as global as us; no other global bank is as German as us,” Jain concluded. “What we are attempting is ambitious, complex and demanding; but if we succeed, it’s worth it.”
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