sabine lautenschlager : european banks - the quest for the best business model speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, at the ecb forum on banking supervision, frankfurt am main, 7 november 2017. * * * the banking sector is going through tough times. having emerged from a major crisis, it faces challenges and change. but one thing has not changed, and it never will. a bank needs a sustainable business model. it has to earn revenues ; it has to keep its costs in check ; and it has to keep its risks under control. how all this is done has changed, however. many things that still worked a couple of years ago no longer work today. let me quickly highlight a few points. profitability is low for many banks. first, for a long time, economic growth was low. together with low interest rates, that has put a brake on a traditional source of revenue. banks, in particular those that have not found a profitable market niche, need to diversify their sources of revenue. digitalisation might offer a solution, but it is certainly not the only one. second, some national banking markets in europe are overbanked and therefore overly competitive. so there is a need for consolidation – consolidation which leads to stronger banks with viable business models. third, many banks still have high costs, partly because of their large branch networks. but how large do these networks actually need to be in this age of digital banking? fourth, some banks are still weighed down by impaired balance sheets. they need to get rid of legacy assets such as non - performing loans. fifth, some banks could improve the way they handle risks. they need to establish a strong risk culture, set up adequate risk governance and integrate it into their overall structure. and finally, all banks have to adapt to more stringent rules. it is true that they come at a cost, but in the long run, their benefits are greater. society benefits in any case, but so do the banks. strong rules help to win people ’ s trust, and that is an important asset for banks. a few banks still have some way to go – they still need to adapt their business models ; they need to find their competitive advantage. those banks which want to prosper in the future need to act now. and it is indeed possible to prosper, even in tough

jurisdiction having legislation giving a preferential claim to deposits of home country in a winding up proceedings ; foreign banks that do not have adequate disclosure requirements in their home jurisdiction ; foreign banks with complex structures ; foreign banks which are not widely held could have maiden presence only by way of wos. also, if the reserve bank of india is not satisfied with the adequacy of supervisory arrangements ( including disclosure arrangements ) and market discipline in the country of their incorporation or reserve bank of india considers necessary for subsidiary form of presence of the bank or if a foreign bank, which has set up its presence in india through branch mode after august 2010, is considered by rbi as being systemically important by virtue of the size of its business, such banks would have to operate through a wos. however, in case of foreign banks which are operating in india before august 2010 shall have the option either to continue their banking business through the branch mode or to convert those branches into a wos. 17. foreign banks have evinced interest on wos structure in india and are deliberating internally their strategy on form of banking presence. the initial minimum paid - up voting equity capital for a wos shall be inr 5 billion ( nearly usd 82 million ). in the case of an existing foreign bank having branch presence in india, which desires or is required to convert into a wos shall have a net worth of inr 5 billion. wos would be permitted to open branches in any centre, except at certain sensitive locations from the perspective of national security, without having the need to take prior permission from reserve bank of india in each case, subject to their opening 25 % of branches in a year in unbanked centres. in the case of foreign bank branches, they may have to seek prior approval of reserve bank for branch expansion in india. 18. financial intermediation in india mainly happens through banks. with a view to improve upon the credit disbursement to certain sectors of the economy which requires stimulus through support from formal financial sector, priority sector lending was introduced in 1970s. the objective was to achieve a wider spread of bank credit, prevent its misuse, direct a larger volume of credit flow to priority sectors and to make it an effective instrument of economic development. the definition of priority sector has evolved over a period of time. priority sector includes those sectors of the economy which in the absence of inclusion in the priority sector categories would not get timely and adequate finance, such as, small loans