salvatore rossi : which new frontiers in banking? speaking notes by mr salvatore rossi, senior deputy governor of the bank of italy and president of the institute for the supervision of insurance ( ivass ), at the 2018 conference on " new frontiers in banking : from corporate governance to risk management ", faculty of economics, la sapienza university, rome, 16 march 2018. * * * in the banking business, the concept of frontier – and its crossing – can be intended in several ways. let ’ s start with size. after the global financial crisis, banking systems in the large advanced economies have undergone a substantial consolidation process. the number of small banks has decreased ; concentration ratios – measured as the share of banking system assets held by the largest five banks – have increased both in the euro area and in the united states. in italy, at the end of 2016, the share of total assets accounted for by the five largest banks amounted to 43 percent. this process is still under way, and will presumably continue in the foreseeable future. it ’ s not always a good thing. from a financial stability perspective, big banks should ideally be highly diversified and less exposed to idiosyncratic risks. however, the lehman crisis proved that big banks may end up holding very similar portfolios, in which case they might become more vulnerable to adverse systemic shocks. in other words, the reduction in idiosyncratic risk might come at the cost of an increase in total risk on their balance sheets. furthermore, the bigger a bank, the greater the “ implicit subsidy ” it enjoys in terms of higher likelihood to be rescued in case of distress, either being bailed out or, in europe, resolved rather than liquidated. it ’ s the well - known “ too - big - to - fail ” problem. all in all, big banks are not necessarily safer from a systemic perspective. it ’ s something that should be evaluated case by case. what about business models? another “ new frontier ” for the bank of the future could be a fundamental change in its business model, for instance from traditional retail banking to asset management or corporate / investment banking. the issue there is profitability, and it has very much to do with rules. the current weakness in bank profitability, particularly in europe, not only depends on macroeconomic cyclical factors, which were very unfavorable in past years, but also on the new requirements in terms of capital and liquidity, that were the regulators ’ response

slowdown in trade weighed on the most important channels of monetary union benefits. a third reason is that our domestic policies have not always been optimal : the reform momentum stalled and long - term growth was not always a priority. certainly some of our panellists will be exploring these aspects further. at this point, i would like to recall slovakia ’ s successful preparations for the euro. while the euro was, and still is, a political project – both in the eu and in slovakia – it is also based on sound economic fundamentals. from a political economy point of view, our euro adoption process was a role model of economic policymaking. we analysed the costs and benefits very deeply – and given the information set we had at the time, most of the analyses are still valid. all the analyses were openly published. we discussed the project with all relevant stakeholders and tried to make sure no one was left behind. we set a target date for euro adoption and ended up being one of the very few countries that never shifted the target adoption date. and today, ten years on, we are looking back with an open mind to see which of the expectations were fulfilled and which were not. as you well know, the final decision on our euro accession was made in july 2008, just before the global financial crisis broke out in september. we could not have hoped for better timing. the euro shielded us from the initial hit of the crisis, while in other emerging markets, exchange rates plummeted. the drop in demand and in oil and food prices at the end of 2008 meant there were no price pressures in early 2009. thus, we were maybe the first country in which the euro was adopted without consumers perceiving any price increases. had we not adopted the euro in 2009, we would not have been able to meet the maastricht criteria for the next 4 to 5 years, as the government deficit increased substantially. you might say we were lucky, but i would rather concur with the great biologist and chemist louis pasteur that fortune favours the prepared. shortly after our entry, slovakia and the rest of the euro area were faced with the most severe financial crisis in european history. the measures taken by the eurosystem were unprecedented and the easing cycle that started in 2008 is only now coming to an end. outside of japan, this is probably the longest easing cycle in the history of central banking. the euro, now twenty years old, can certainly be described as a mature currency