Introduction of panelists
Good afternoon, and welcome to this timely event to discuss financial services in Europe.
Before we begin, I would like to congratulate with Dean Rapaccioli and her team for the growing success of these International Business Weeks. I firmly believe that the global approach we are discussing is vital for success in business today.
It is an honor to be on stage here two with respected leaders of the financial services industry.
Stefano Marsaglia, Executive Chairman of Mediobanca, has done it all over his thirty year career and Greg Minson, a Managing Director of Goldman Sachs, has also seen more than a thing or two since he got his bachelor’s in economics in Fordham 20 years ago.
Stefano and Greg, thank you both for taking the time to be here today.
It is easy for me to introduce Stefano and Greg – they have been my friends for a long time. I want this to be a more relaxed, informal panel where the whole audience feels welcome to participate in the debate with questions and comments.
Please take advantage of this discussion: experienced managers like Stefano and Greg have enriching insights about international business. Moments like this are an opportunity to learn from their concrete, daily work in this sector. Let’s be inspired by these two extraordinary experts.
The financial services market: Its dynamism and innovation can’t be turned off…
As a veteran of the financial services industry, I have experienced its innovative attitude. But well before my time, it has had a key role in the evolution of our society.
It goes back to the ancient Romans, who had to finance agriculture and wars, and the XIII century, during the period of the maritime republics, when the first banks were born.
If you Google “world’s first modern public bank,”1 you will read about Banco di San Giorgio, which was founded in 1407 in the Italian port city of Genoa.
Banco di San Giorgio was so powerful that Niccolò Machiavelli, the author of The Prince and father of modern political science, once described it as “a state within a state.”
Even in its early stages, evolution existed in the financial services industry. At first, banks mainly focused on trade and merchant transactions. But they soon became complex institutions that managed numerous complicated business streams.
Not long into my career, I had the opportunity to work for a medium-sized Italian bank led by a visionary CEO that allowed me, as part of the senior management team, to turn a local bank named BIPOP into one of the world’s largest online financial institutions.
Through its subsidiary, Fineco, BIPOP delivered triple-digit growth in asset and net profit for five consecutive years. In that time, its market capitalization jumped from €300 million to more than €20 billion, thanks to a business model that took advantage of innovations in online and multichannel distribution.
Based on that success, I firmly believe in innovation.
Later, I became CEO of La Centrale Merchant, a financial institution that had two large insurance companies as main shareholders: Generali from Italy and Allianz from Germany.
When I was in that position, Italy’s finance minister at that time, Giulio Tremonti, appointed me to the Experts Committee of Cassa Depositi e Prestiti, the biggest bank for infrastructure of the world.
Today, I still work doing advisory on infrastructure in high growth countries. Some call this activity “business diplomacy,” which I think is quite accurate because it requires balancing the needs of a wide number of stakeholders.
With regards to the financial services industry, we should remember the US and Europe chose different roads.
In the US, when President Clinton canceled the Glass Steagal Act in 1999, it allowed financial institutions to carry on both traditional banking and investment banking. Meanwhile, in Europe, these two businesses remained separate.
Yet financial services remains one of the most dynamic sectors of Europe’s economy. And in recent years, this sector has probably seen the largest number of unexpected changes in its history.
Probably you are immediately thinking of the consequences of the financial crisis that began in the summer of 2007… Yes, indeed this is one of the changes I am talking about, but not the only one. Not all of them were so negative…
Using a car race metaphor, I see the financial crisis as “only” a very tight curve taken at high speed. You do not necessarily go off the road; it depends both on the car you are driving and on your skills as a driver.
For example, look at what happened to derivatives in mid-2007. In the middle of the race, while the financial service market kept the accelerator down to move quickly towards new goals, the US ABS market suddenly collapsed, and derivatives market with it.
But this did not end the race … Certainly all financial institutions were shaken by this crisis, but as some fell down, others grew quickly by adapting to the new scenario. This illustrates the dynamism of this market.
A decade later, we can see that the derivatives market did not die. It is more active than ever. In the European Union alone, it reached an estimated notional value2 of more than €450 trillion at the end of February 2017.
In fact, we should now see even more clearly that derivatives are instruments for addressing business uncertainty, and not are an absolute evil. Of course, it depends on how you use them.
Apart from dynamism, innovation is an important feature of this industry.
Every day, new financial products are invented to meet the broadest range of needs. These new products widely vary in types, risks and complexities, but they are all pivotal to making business work.
Think about digitalization, which now is the leading trend in financial services. Immediacy, simplicity and automation characterize this digital age – financial services must achieve these qualities in their offer. It is not by chance that we are now experiencing the explosion of digital currencies and transactions thanks to the new, revolutionary blockchain technology.
Innovation represents the ability of this sector to continually revitalize itself, to always rapidly answer changes in the needs of market and clients, whether they are big or small companies, investors, individuals, consumers, governments, or public organizations.
Regulation and competition: Threat or opportunity?
But the most relevant words for this sector are regulation and competition.
Let’s talk about regulation. Over the last 15 to 20 years, we have seen how regulators have gradually become stronger, building a “fence” around the financial sector to avoid new crises and market shocks. This is especially true for Europe, but also at the global level.
In terms of international rules, we have the Basel agreements (the first in 1988, the last, Basel 3 in 2010), proposed by the Basel Committee, representing the central banks of the G10 countries, with the aim of giving clear international rules in bank supervision and aligning banks capital requirements at the international level. This was mostly necessary, considering the rapid process of globalization of this sector.
Personally, I began to better understand the impact of capital ratios when I was in the Strategic Management program at INSEAD in Fontainbleau. One of my Professors was Jean Vermine, who was a member of the commission in charge of introducing Basel 1 rules in Europe.
These rules are deeply rooted in Europe’s banking culture. The Basel 3 agreement in particular dictates liquidity and capital ratios, capital adequacy and leverage. The aim of the regulators is to control risks and mitigate losses. In short, the higher a risk the bank takes, the higher the capital the bank must have.
This has had a heavy impact on banks, making them more selective in granting credit to enterprises and therefore reducing their support for the economy.
As a consequence of Basel 3 rules, banks were obliged to improve their compliance and risk management processes, making them much more effective.
But, above all, banks were obliged to reduce leverage and to reinforce their capital. This meant:
- raising new capital on the market3
- requiring higher credit rating from clients
- selling bad assets4 like NPLs
- selling assets with high capital absorption, exchanging some business for cash
Consider that as soon as Basel 3 was communicated, European banks reduced their leverage ratio (measured as assets to equity) from an average of ~29x to 25x.5
In addition, to reinforce their capital, many institutions were forced to merge, which fueled the M&A market. Stefano will soon dive into this important topic.
On the other side, capital pressure created another important market. Recently we have seen the explosion in issues of NPLs as a legacy of years of economic slowdown. As a consequence of regulation, intermediaries were forced to get rid of the problematic assets.
The consequence was the arrival of operators who specialize in professional management of this type of risk, giving prompt support to the stability and profitability of the banking sector that was pressed by bad loans.6 These players are buying NPLs and creating value from their profitable management.
Here, we are benefiting from Greg’s experience, as at Goldman Sachs he created a successful business area completely devoted to NPL management.
But the total volume of NPLs across the EU is still very large, at €950 billion, so I think there is still a lot of work to do for people like Mr. Minson and his colleagues…
…and for his competitors, of course. As I said, the financial services market always offers good opportunities and will remain interesting for many new players.
Financial services are becoming a very crowded arena of different operators compared to several years ago. Traditional players are now facing newcomers from China and the Middle East. Countries that were not in the business until a few years ago are now dangerous competitors.
But this is what globalization means….
This is only one side of the coin, because on the other side of the coin we have increasing competition resulting from new technologies. We are living in the era of block chain, virtual currencies and FinTech.
The use of data and analytics to predict client needs, improve processes and services, and prevent fraud is becoming more common than ever.
Technology also brings more disintermediation. New players in the market, like Apple pay, Paypal and others offering complete “financial wellness platforms” are allowing clients to budget, bank, pay, and crowd-fund with their smartphones. Moreover, sometimes these players are not affected by regulation as traditional providers (so-called shadow banking).
But this is what digitalization means…
Competition and regulation are both positive tools for the efficiency of financial services markets, but of course rules must be equal for everyone and guarantee that competition goes for the benefit of users.
What’s the future?
In the global market, I think that Europe will remain the point of reference in this sector, regardless of Brexit.
FinTechs are for sure an opportunity for the entire economy: for retail users, for businesses and for traditional financial players.
In this sense, I firmly believe that we will see an increasing collaboration and alliance between more traditional players and new, innovative ones.
Of course, there remain risks and threats in the financial services market. They cannot be addressed just with rules or technology … what is needed are skilled, responsible managers who can combine attention to value with ethics.
Our esteemed panelists here are among the best guides we have for an overview of financial services, but they are also models of responsible managers.
So, Stefano, Greg … what can you tell our young audience about the next big changes in the financial services industry? For example, does technological change mean hard times for banks, or do you see a winning alliance between traditional banking and innovative services? What, in your opinion, are the main trends we will experience in this market?
Greg, Stefano, I leave you the floor…
1 www.ft.com/intl/cms/s/0/6851f286-288d-11de-8dbf-00144feabdc0.html#axzz2ycmbeCR9 “The World’s First Modern, Public Bank,” Financial Times Magazine. April 17, 2009.
2 Source ESMA: https://www.esma.europa.eu/press-news/esma-news/esma-produces-first-overview-eu-dernplivative-markets-size
3 Since 2014 to end 2017, banks in the euro area have increased their capital by EUR 234 billion and added EUR 813 billion of liquid assets. Source: European Commission
4 The average ratio of NPLs has decreased by one third since 2014 and is on a steady downward trend. Source: European Commission
5 Source: Bank of Italy Occasional Papers, “EU bank deleveraging”, September 2014
6 At mid 2017, the NPL ratio of EU banks declined to 4.6% (Q2 2017), reaching the lowest level since end 2014 Source: European Commission