Denis Beau: Competitiveness of the European financial sector in the
digital context
Introductory remarks by Mr Denis Beau, First Deputy Governor of the Bank of France,
at the Fourteenth Annual European Financial Services Round Table " Financial Services
in Europe - fit for the future", Frankfurt am Main, 22 March 2024.
* * *
Ladies and Gentlemen,
I would like to structure my initial remarks around 3 points:
I. The role of regulation with respect to the competitiveness of the European Financial
Sector in the digital age.
II. My perspective as supervisor on the ability of the traditional core players to
navigate successfully the digital transformation underway.
III. The contribution supervision may bring.
I. On the role of regulation,
1. Let me start with stating certainly the obvious: The
relationship between
regulation, innovation, and competitiveness is not straightforward; it's
complex and multifaceted. Innovation, while a crucial driver of competitiveness,
is not its sole determinant. Similarly, regulation certainly influences innovation but
through many different channels and its impact can be two-sided. And let's
remember that without customer demand, there is no innovation.
2. But regulation can contribute to create a nurturing environment for innovation and
competition. This seems clear when looking at the financial sector. Initiatives like
the Payment Services Directives - 1, 2 and soon 3 are for me a good case in
point. And the forthcoming regulations on crypto-assets (MICA) and open finance
(FIDA) could also bring such benefits by providing a regulatory framework that
creates confidence and stability both for market players, old and new, and for
consumers. This is essential to ensure sustainable benefits for the effectiveness
and efficiency of the financial sector and thus a tool for competitiveness.
And it is important that the regulatory framework is well kept in tune with
transformations underway or the need to create what François Villeroy has called
in a recent speech a "genuine financing union for transition". For instance, while
MiCA represents a fundamental regulatory advance, it will need to be
complemented in the coming years to cover the emerging DeFi ecosystem.
3. However, innovation and competitiveness are obviously not the be-all and
end-all of any regulation. Goals such as consumer protection, AML-CFT,
financial stability, sovereignty, are just as legitimate. And that should certainly be
the case for services like financial ones where information technology facilitates
the exploitation of huge economies of scale and network effects. There is
therefore a great risk that these markets will be dominated by very large players -
in the cloud or, perhaps tomorrow, in generative AI. It is no surprise and legitimate
that regulations such as DORA, and the AI Act currently being adopted, aim to
provide tools to limit the systemic risks that excessive dependence of financial
players on a few critical service providers could generate. Here, sovereignty, the
promotion of innovation, and the fight against market concentration
converge as legitimate objectives for regulation .
II. Regarding my perspective as supervisor and central banker, on
the ability of traditional core players of the European financial system
to navigate successfully the digital transformation underway, I see
many reasons to stay optimistic. Let me just mention two:
1. First, according to SSM and ACPR most recent surveys, traditional banks,
once thought to be at risk of obsolescence, are adapting, embracing new
technologies, and reimagining their roles in a changing financial system, in which
we are witnessing the emergence of new players, new infrastructures and new
settlement assets which may challenge the traditional architecture of the monetary
and financial edifice. Banks seem keen to embrace new technologies, either on
their own or in partnership with innovative players. The survey published last year
by the ECB shows that almost all of the banks now have a digital strategy in place
with a core focus to improve profitability, either by enhancing customers
experience or improving operational efficiency. However, the average budget
banks are allocating to the digital transformation is still limited but it is likely to
grow going forward, and I am firmly convinced that banks still have a role to play
in the future, even as so- called decentralized finance progresses: I would not pit
the old world against the new.
2. Second, central banks are seriously considering adapting their services in
central bank money in the wholesale or the retail space, or both to maintain
central bank money as the anchor of a morphing payment and more broadly
financial system towards a world where crypto-based alternatives to traditional
finance centralized around trusted institutions- the central bank, credit institutions
and market infrastructures may significantly prosper. This is certainly the case of
the central banks of the Eurosystem (but I do not elaborate on that point at Ulrich
Bindseil will certainly do)
III. Finally, let me conclude in saying a word on the positive
contribution supervision can bring to the development of an
innovative and competitive financial system in the digital age.
1. Speaking from the stand point of an SSM bank supervisor, this contribution has
taken the form so far of putting among our supervisory priorities, within our
mandate of keeping the banking system safe and sound, and beyond the
strengthening of banks' resilience to immediate macro and geopolitical shocks,
and of the strengthening of their management of climate and environmental risks,
that banks make further progress in their digital transformation . The
objective here is to ensure that they address herewith the risk digitalization create
on the sustainability of their business model and their profitability.
2. Should we go beyond? For instance some recent industry proposals call for a
broader mandate of the EU supervisory and regulatory authorities to include the
2.
goal of competitiveness of the EU financial sector . I am not sure that for us,
supervisors, this would be appropriate as I believe that the supervisor's essential
mission should remain to contribute to ensure financial stability as I see it as a
necessary pre-condition to any sustainable competitiveness. It might be different
for regulators but when I consider for instance the outcome of the negotiations on
the banking regulation package, which preserves overall alignment with Basel 3
while taking into account European specificities with the phase-in of the output
floor, or the possibility to adopt a delegated act to postpone or adjust the market
risk reform, should other major jurisdictions fail to deliver on their own
implementation, I see that in practice the issue of competitiveness is already
taken on board.
This is the reason why in 2020,
the Banque de France launched a large-scale
experimentation program on wholesale CBDC with a number of market participants.
This program has allowed us to understand better how DLTs work and the benefits that
are likely to emerge for financial markets.
Our main motivation is to extend the existing trust in our settlement
infrastructure and assets to transactions carried out on DLTs. Their settlement in
central bank money appears essential to guarantee the players in these markets
against the counterparty risks inherent with other, private tokenised settlement assets.
The new European DLT pilot regime, which will come into force in March this year, will
allow us to continue our experiments within the boundaries of a simplified regulatory
framework.
At the same time, the Banque de France is contributing to the reflection on the
possibility of a retail CBDC: this is currently what Eurosystem central banks have
embarked on, under the ECB aegis, with the ongoing investigation phase for a digital
euro. The evolution of the payment landscape leads us to reflect on the ways in which
citizens can have access to central bank money, also in the digital world.
Let me conclude in saying that tokenization can be a blessing or a curse for the
functioning of the financial system. It is my belief that we can collectively make the best
of it if we ensure its expansion within a framework of confidence in which good
regulation has an important role to play.