On Thursday morning, PwC Luxembourg held their 15th annual Banking Day at the Chambre de Commerce in Luxembourg-Kirchberg on the topic of "Banks: Big bang or the theory of evolution?".
With each groundbreaking innovation, players must adapt to survive. The banking sector is no exception to the theory of evolution. The financial crisis and new technologies have reshaped banking activities and models. Two factors are at play: prudential financial regulation and the digital revolution. With this new context, the question is towards what models will the Luxembourg banks move?
John Parkhouse, CEO at PwC Luxembourg, introduced the event and referred to the Global CEO survey released at the recent Davos summit which highlighted a number of challenges for bankers around the world, including growth and both geopolitical and macro-economic risks, with many seeing technological advances as both an opportunity and a potential hindrance to growth, with the growth of cyber security and the threat of criminality in the sector. He stated that Luxembourg is not immune but has proven to be extremely resilient, with the private banking and asset servicing core components of the banking sector benefitting from the positive ecosystem. Luxembourg also offers agility and focus towards the future. Re LuxLeaks, he stated that the reputation of Luxembourg has survived intact. In a nutshell, he sees a very bright future as long as Luxembourg remains agile and we remain in a banking-friendly environment.
Olivier Carré, Partner and Banking Leader at PwC Luxembourg, stated "Financial stability, capital and liquidity, the Banking Union and resolution mechanisms - the new regulations deployed since the crisis abound. These rules, coupled with extremely low rates, draw the sector’s profitability to the bottom. In less than a decade, banks have moved from a solvency challenge to a profitability one." He referred to FinTech as an access to growth and described Luxembourg as a very diverse ecosystem. He referred to the changing environment of social media and expects many more changes to come in the banking sector, with the value chain from the past expected to evolve.
On regulation, there is much more than before. With pressures on the banking sector concerning both revenue and low interest rates, the sector must work together with the financial regulator, the CSSF, for change which is part of the system. He said that the main success factors of Luxembourg are the way it evolves, with the industry having a spread of diversified service providers, with more services provided to more sophisticated clients. There is a clear evolution from traditional wealth management to servising high-net-worth international clients. Therefore, the toolbox in Luxembourg needs to be well-equipped.
Luxembourg's Minister of Finance, Pierre Gramegna, presented the government's view. He addressed the issue of reputation which he described as a key driver of the government in recent years. He explained that Luxembourg's reputation was starting to be dented, but he hopes 2016 will benefit from the changes in 2015 regarding transparency, etc. He said that the reaction in last week's OECD event in Paris revealed that the external perception is of Luxembourg leading the way in transparency.
He senses that a level playing feild is coming and is not afraid of it at all. As of last week, 94 countries have signed to adopt the common reporting standard; the concept of Global Responsibility is now catching up. Private Banking in Luxembourg is still strong despite the end of banking secrecy and tax transparency. He stressed that we need to remain vigilant in Luxembourg and need to continue to oppose the financial transaction tax which 10 countries want to introduce.
He stated that the UK and Luxembourg have similar interests (in the financial industry) and we do what we can to keep the UK in the EU. Discussions will continue on finding ways for compromise. We said "we have recent experience in Luxembourg on referenda and it's not that easy". He also referred to the improvement in confidence in Europe from other jurisdictions including the Far East. He also referred to coming from an era of low regulation to over-regulation, with Luxembourg pushing many issues on banking union, including brokering a deal on the benchmark directive. Nevertheless, there are still MIFID II, the 4th anti-money-laundering directive amongst others which remain still to do in Luxembourg.
He finished that Europe is undergoing a recovery with growth at 2%, with low commodity prices, etc., with some EU Member States still needign to do some structural reform, with Luxembourg having some work still to do. Luxembourg is moving towards a balanced budget with the measures taken 2 years ago now bearing fruit.
On FinTech, he said Luxembourg has become a hub for eCommerce payments, an important part of the value chain. New inventions will change the way business is done. In the 90s, chips had to be smaller, faster and stronger. Nowadays, the challenge in FinTech is to be more agile and faster, with virtual currencies part of the future. The Luxembourg House of FinTech will be launched this year and will give more visibility to Luxembourg as a FinTech hub, with the FinTech community operating in a federal environment.
Mungo Wilson, Associate Professor of Finance at Said Business School (University of Oxford), talked about banks and their competitive challenges. He referred to the credit crisis in 2008 and touched on the degree of leverage on business, with the UK suffering much more than the US. Banks grew since the 1960s due to technology and gradual relaxation of restrictions (interstate banking, etc.). In real terms, banks have quadrupled in size since 1984, while the total number of independent banks (in the US) has plummeted, with the market share of the 10 largest banks growing significantly in the same period. This has been due to benefit of scale, but there have been costs too: one of the effects has been access to the loan market has declined for SMEs. He stressed that the more a bank grows, the more hierarchy comes between the customer and those at the top, with banks therefore less able to do loans with SMEs. This has been a problem in the UK and the US, but less of a problem on continental Europe.
The event continued with panel discussions and concluded with a walking lunch.
Photos by Geoff Thompson: (top) John Parkhouse; (below) Minister Pierre Gramegna
