Welcome address
Banco de España-SUERF Conference "Financial Disintermediation and the
Future of the Banking Sector"
Pablo Hernández de Cos
Governor

Good morning. I would like to welcome you to the conference "Financial disintermediation
and the future of the banking sector", hosted by the Banco de España and co-organised
with SUERF.
Let me start by thanking our colleagues from SUERF for their participation and involvement
in the conference. SUERF is a unique institution that has been very successful in creating
an active network of academics, financial practitioners and policymakers for the analysis
and discussion of monetary and financial issues. Its outreach is achieved through the
organization of international events, such as today ́s conference, publications and a very
active sponsoring of research.
It is well known that capital markets in Europe are less developed than in the United States.
This is related to the more significant role played by banks in Europe for the provision of
funding to firms than their US peers. To illustrate this, let me give you some figures. In 2017,
the ratio of financing through fixed-income securities to total debt financing was 12% in the
euro area versus 43% in the United States. Also, the ratio of equity market capitalisation
over the domestic credit provided by banks to the private sector was almost four times
larger in the United States than in the euro area at the end of 2016 according to the latest
data provided by World Bank DataBank.
There is not a consensus in the academic literature on what source of financing has a higher
contribution to financial stability and economic growth.1 On the one hand, banks, through
their interaction with firms, manage private information which benefits the allocation of credit
and favors a better and cheaper access of firms to financing when the bank-firm relationship
is well developed.2
On the other hand, liquid and efficient financial markets offer the possibility of allocating
households' savings to long-term projects without the need of monitoring these savings.
Although financial intermediaries and markets have been generally considered as alternative
and competing ways of overcoming frictions between savers and investors, they can be
also considered as complementary sources to achieve an optimal allocation of capital. In
fact, there is some evidence in the economic literature that a proper diversification of firms'
funding leads to more investment3 and to a lower vulnerability to financial shocks.4 These
results suggest that financing structures based exclusively in one of the two sources of
funding are probably suboptimal.
Certainly, the experience of the recent global banking crisis clearly shows that firms relying
only on bank financing had more difficulties in their access to external funding than
companies with a richer diversification of their liabilities. This problem was even more acute
in the case of those firms, mainly SMEs, that relied in only a limited number of lenders facing
financial problems since their ability to switch to a new lender was not always easy due to
asymmetric information problems.5
Given the generally low level of diversification of liabilities of European firms, and the risk
this poses for the corporate sector to face shocks affecting the bank lending channel, there
seems to be some room for a higher role of capital market financing in Europe.
Moreover, European financial markets not only are less developed than their US
counterparts but they are also less integrated. Apart from the aforementioned implications
in terms of the low diversification of firms' financing sources, this situation has also
implications for the ability of households and firms to hedge against country-specific
sources of risk to smooth income, consumption or investment growth.
The evidence for United States shows that cross-ownership of assets all over the country,
and especially equity securities, has played a key role in smoothing state-specific shocks6.
By contrast, this mechanism is less powerful in Europe since the cross-border ownership of
assets is still limited.
The project of the Capital Markets Union (CMU) aims at the developing and integration of
capital markets in Europe. In my view, the CMU project is an important step forward to reach
the goal of correcting some structural deficiencies of the EU capital markets in terms of their
relative underdevelopment and fragmentation.
CMU Action Plan was launched in 2015 by the European Commission by setting out a list
of over 30 actions and related measures to establish the building blocks of an integrated
capital market in the European Union by 2019. So far the implementation of these measures
has been slow.
In any event, in recent years the role of European capital markets as a source of funding for
firms has increased. For example, the ratio of financing through fixed-income securities to
total debt financing has grown from 8% in 2007 to 12 % in 2017. A similar trend has also
been observed in other advanced economies including the United States.
Understanding the driving forces of this trend is important in order to assess its main
implications. Some factors are possibly of a transitory nature. Among these factors are the
post-crisis monetary policies and their implementation. In particular, the introduction in
mid2016 of the Corporate Sector Purchase Programme (CSPP) as part of the ECB Asset
Purchase Programme, has contributed to lower the cost of firms' financing through the
issuance of fixed-income securities relative to the cost of bank funding, thus encouraging
large companies to switch bank financing to bond financing. A recent Banco de España's
research paper documents that this programme also had a positive side effect on the access
of SMEs to funding given that banks reallocated the credit previously granted to bond
issuers to smaller firms that do not have access to financial markets.7
Among the more permanent factors that could have contributed to the recent trend of
financial disintermediation is the introduction of the new global banking regulation as a
reaction to the financial crisis. The new regulation aims to improve primarily the resilience
of banks to shocks and will have a positive impact on overall financial stability. However, as
it has been documented in some papers, these regulatory measures might also reduce
somewhat the ability of banks to compete in the intermediation of some financial flows8.
But going forward, it is still under debate at the global level to what extent elements of the
new regulatory framework should be also applicable to some non bank financing channels,
as long as they might share with banking activities similar underlying risks to financial
stability, such as maturity transformation and high leverage. If finally applicable, this might
imply a more level playing field between banking and non bank intermediation.
Another permanent factor that is contributing to the development of capital markets in the
EU is the launch of new markets such as the alternative stock and fixed-income markets
aimed at attracting medium-sized companies, although the size of these markets is still
relatively small.
It goes without saying that these changes in the structure of financial markets, in
combination with the emergence of new technological advances, pose a challenge for
banks. Particularly so against the current background of low profitability of the banking
systems in Europe.
The arrival of new technologies has reduced the barriers to entry in certain traditional
banking activities, creating the possibility for new competitors to banks, such as the FinTech
companies, to access bank customers in a highly dynamic manner for a relatively modest
investment outlay9.
But the new technologies do not only pose threats for banks, they also offer opportunities
for them in terms of potential efficiency gains. One example is the application of artificial
intelligence and the systematic use of large databases with real-time information and a high
degree of disaggregation (commonly known as big data) for both their commercial business
and for regulatory compliance.
Apart from the potential efficiency gains for banks and for the financial system as a whole,
the application of some of the new technologies in the financial sector could bring other
benefits for the society, including a greater financial inclusion by reducing intermediation
costs, which would improve the access to funding of households and SMEs.
In any case, at this stage, the ultimate impact of new technologies on the structure of the
financial system is highly uncertain as it will depend on different factors including the
regulatory treatment of the new players.10
Today ́s conference will cover all these issues related to the recent changes in the structure
of financial markets and their implications for the banking system. We have the privilege to
have as speakers experts in those areas from academia, policy makers, think tanks and the
banking industry. I am sure that we will have a very productive debate and that we will
improve our understanding of these issues.
Finally, allow me to express once again my gratitude to the co-organizers of this event for
making the conference possible, and to wish all the participants a very fruitful meeting and
a pleasant stay in Madrid.
And without further due, let me now introduce our first speaker, Governor Philip Lane. It is
a special honor for us to have him here today. He is especially suited to be our first Keynote
Speaker in this event because he has a profound knowledge of economy and finance, as a
result of his long and prestigious career as an academic, as well as a brilliant policy-maker.
His keynote speech today will verse about "Trends and Cycles in Financial Intermediation".
Philip, you have the floor...