Finance and Regulation
Banks have to digest the legacy of the crisis, comply with new rules, and develop new, profitable business models in a world of low economic growth, deleveraging and extremely low interest rates.
Large systemic banks, once considered to be the champions of risk management, are now considered a threat for financial stability and for society as a whole. Additional capital requirements, zero risk tolerance, and even an obligation to split retail activities from investment banking, are threatening the EU model of universal banks.
Not all legislation is created equal
Recent findings from a Vlerick study with Ageas compare the specific asset allocation implications for insurers due to differences between Solvency II and Basel III.
Preliminary results indicate regulatory arbitrage opportunities on residential mortgage loans, whereby insurers have a comparative advantage over banks in the sub-segment of low rated, low loan-to-value mortgage loans.
It is clear therefore that legislation will clearly impact future business models in the financial services sector.
So, are traditional business models still viable, particularly as new regulations, demanding more capital, more liquidity and less leverage lead to higher funding costs, lower income and a squeezed return-on-equity?
The unanswered questions:
• How can banks adapt their business model, and make sure they deliver adequate levels of ROI?
• Which finance activities will be impacted the most?
• Will banks still be able to play an important role in financing the economy?
• Will they split off parts of their activities?
• How can banks, given new resolution mechanisms, still remain attractive to investors?
• And what will be the impact on investments in ICT and employment?
Freddy Van den Spiegel
Adjunct Professor at Vlerick Business School.
Apart from his work at Vlerick, Freddy is also Economic advisor to BNP Paribas Fortis and Professor at the University of Brussels. Freddy obtained a PhD in Economics at the Free University of Brussels. His interests include regulation and supervision, as well as the impact of globalisation and European integration on financial markets and risks.