2018-11-23【VCAF Seminar Review】 - Financial crisis, Brexit, the future of European banks

By Feng Ruan


This year marks the 10th anniversary of the 2008 financial crisis, the most significant financial and economic upheaval since the great depression. Are the banks more resilient to the next financial crisis, and where do European banks stand now? Will it be a soft or hard Brexit, or even a no-deal in the end? How will it reshape the financial industry in Europe? How banks should prepare for era of digitalization?


On the Friday afternoon, Nov. 23, 2018, we have invited two keynote speakers Mr. Jan Schildbach from Deutsche Bank Research and Mr. Prof. Dr. Jörg Richard Werner from the Frankfurt School of Finance & Management, sharing with us the topics on Financial crisis, Brexit, the future of European banks.


As usual, Mr. Yang Jiao moderated the seminar, and Chairwoman Ms. Xiaofeng Fu gave us a brief introduction of VCAF at the beginning of the seminar. In 2018 we have invited high-profile speakers as well as our research group, giving us seminars on a range of topics, from Bitcion and Blockchain to the history of high-speed rail in China, from big data, data analytics to data protection, from Robo advice to the bank in the future.


(Moderator Mr. Yang Jiao) 

Presentation: Where do European banks stand - 10 years after the financial crisis and the impact of Brexit

 (Mr. Jan Schildbach, Director and Head of Banking, Financial Markets and Regulation at Deutsche Bank Research)

Mr. Schildbach started this presentation with a question: How did the European Banking System change after the peak of 2008 Financial Crisis? Based on the data from the 20 largest banks in Europe, the bank performance has been recovering, but the profitability by the end of 2017 still lingered at round half of the pre-crisis level. In this sense, European banks’ recovery from crisis lagged far behind US peers in terms of both total revenues and net income. In H1 this year, the net income for US banks reached a total of USD 116 bn while European banks posted a combined net profit of only EUR 48 bn. Mr. Schildbach pointed out, the unsynchronized recovery between European and US banks could be partly attributed to the fact that the Fed already started the rate hike cycle in 2015 while the ECB would still prolong the low euro-zone interest rates at least to the end of 2019. On the other hand, the low interest rate environment has improved asset quality at banks and largely reduced non-performing loan ratios. Regulators also introduced Common Equity Tier 1 (CET1) as “Gold Standard” to measure capital ratios for the banking industry. In 2017, the CET1 ratio for the 20 largest banks stands at 14% on average compared to 7% during the crisis in 2008.


In 2017, the European banking sector achieved its second-best result since the financial crisis. However, Mr. Schildbach pointed out that the sector might continue to shrink. Since 2011, the combined assets for Eurozone banks have dropped from 344% of GDP to 272% today. Banks’ hopes for rate hikes have also been scaled back, as ECB indicates no refinancing rate increase expected before 2020. From Brexit, Italy worries to U.S. trade war, any uncertainties from such geopolitical and geo-economic events could spark the next recession. Slowdown might already be on the horizon, for instance, German GDP growth is expected to fall from 2.2% in 2017 to 1.3% next year.


When it comes to the implication of Brexit, Mr. Schildbach described to the audience different scenarios and the corresponding indicative probability of each possible outcome. UK is heavily dependent on financial services industry, and London is Europe’s undisputed financial centre. Without access to the single market, many EU-related businesses would have to relocate, which requires ring-fencing of additional substantial capital in continental Europe. Furthermore, Euro clearing would very likely shift to EU, and additional collaterals would be required due to loss of netting benefits. In the conclusion, Mr. Schildbach also showed his concern about Brexit for its bad timing, as global influence has already shifted from European banks to their counterparts in the U.S. and Asia.


Presentation: Banks in changing – Perspective for the banks after the financial crisis and in the time of digital revolution

(Prof. Dr. Jörg Richard Werner, Professor of Accounting at Frankfurt School of Finance & Management)


In the second presentation, Prof. Werner extended the viewpoints from Mr. Schildbach on the divergence of the post-crisis recovery for US and European banks. On the one hand, ECB had to be very cautious about Eurozone’s nascent recovery, as sovereign debt crisis and high household debt were persistent headwinds for European banking sector. On the other hand, the European banks have been compelled to adhere to higher standards introduced by regulators to be more resilient, but unfortunately the preventive measures did not come without a cost.   


Prof. Werner also shared with us the latest trend of FinTech and digitalization of banking, which echoed the topics on Big Data and Robo Advisor in our previous VCAF seminars. Based on Porter's Five Forces Model, Prof. Werner illustrated the challenges for the traditional banking industry after the crisis. He reviewed how Alibaba as a market entrant has evolved from an e-commerce platform to a leading internet financial service provider; how the traditional banks as incumbents fought back by digitalizing the payment system to keep their competitiveness. It is imperative for the traditional banking sector to accommodate new consumer preferences and cultures as well as being more adaptive to the evolving industrial eco-system and new business models. Based on the PwC survey for retail banking, 87% of respondents considered Technology & Innovation very important, but only 11% of the banks had been structurally prepared for innovations. In the Professor’s point of view, traditional banks should stay more open to such transformations especially in the new era of data analytics and big data.


During the Q&A session, the audience members have been very engaged with questions from different angles. For example, whether the purchasing of sovereign bonds issued by peripheral countries of the Eurozone would possibly trigger the next sovereign debt crisis? Will the ultra-low interest rate environment or the financial innovations (e.g. p2p lending and digital assets) pose a risk to the next crisis? What are the constraints for banks in advancing technology during the trend of digital banking and FinTech? The audience questions have not only extended the topics of discussion, but also provide organic feedbacks to the speakers in different perspectives.


Ms. Xiaofeng Fu (left) and Prof. Dr. Jörg Richard Werner (right)


The VCAF seminar series have now come to an end this year. Just stay with us, and looking forward to our upcoming events in 2019!