yves mersch : the future of banking – a central banker ’ s view speech by mr yves mersch, member of the executive board of the european central bank, at the economist future of banking summit, paris, 10 march 2015. * * * ladies and gentlemen, it is a pleasure to be here this morning to open this conference on the “ the future of banking ”. what i would like to discuss in my remarks is the challenges facing the european banking sector and the right policy responses. the main point i would like to make is that we need a balanced approach – supporting the healthy forces of creative destruction, while at the same time protecting consumers and the essential functions of banks in servicing the economy. the future for the european banking sector is currently clouded in uncertainty. european banks are coming out of the crisis facing disruptive forces from all sides. they confront three main challenges to their business models. the first is dealing with the legacy effects of the crisis on their balance sheets. since 2009 banks have been going through an arduous process of restructuring and deleveraging : shedding non - core business lines, writing down impaired assets and increasing provisions. this process has been costly both in terms of lower profits and diverted management time. many banks also still have to work through their large stock of non - performing loans ( npls ), which further weighs on earnings prospects. sufficient recovery from npl resolution is hindered by slow national insolvency procedures for firms and an underdeveloped european distressed debt market. the second challenge is adapting to the new wave of regulation since the crisis. banks have been required to improve both the quantity and quality of their capital, which has, in the short - term at least, led to a de - risking of banks ’ balance sheets to improve riskweighted assets. the incoming leverage ratio, which will put a cap on balance sheet size, is also obliging banks to make difficult decisions over how to allocate assets and which business lines to maintain. and reform proposals are on the horizon that will limit crosssubsidisation between banking and trading activities, which will require some adaptation in the business models of europe ’ s universal banks. third, banks are faced with profound structural changes. as evolving customer preferences interact with new technology, for instance in the growth of internet and mobile banking, barriers to entry into banking are falling. banks with large branch networks are being exposed to competition from lower cost and less regulated operators. we see this already

, which is critical for innovative young firms, market fragmentation in europe creates a self - fulfilling brake on progress. venture capital firms do not have a large enough deal flow to cover the majority of investments that will fail, meaning fewer investments are made. 1 so we need to work towards a genuine single market for all forms of financing – for loans, bonds and equity. still, despite all these positive aspects, we must also recognise that, in practice, the process of adaptation and structural change in the financial sector could have unwelcome consequences. as such, we cannot be completely agnostic about how that process evolves. indeed, there are at least two possible outcomes from this changing environment that we need to be particularly careful to avoid. the first is that innovation comes at a cost to consumer protection. we have already seen in some european countries the risks posed by the emergence of new actors with little official oversight – internet payday lenders, for example. and such activities by unregulated non - banks can create pressure for a race - to - the - bottom among more regulated banks, which would also be detrimental consumer security. we therefore need to ensure the right balance between innovation and regulation. the regulatory landscape should not stifle new operators or protect the rents of banks, but it also needs to be consistent and fair. the second outcome we need to avoid is that the pressures of the new environment cause bank lending to fall too much and then stay too low. i say this not because there is any ex ante preference for bank lending over other forms of credit. i say it because, whether we like it or not, banks have a vital social function in europe in taking the credit risk to lend to small - and medium - sized enterprises ( smes ). and even with a more diversified financing mix in europe, this function is essentially irreplaceable by non - banks. it is only really banks – and in particular larger banks – that have large enough balance sheets to effectively diversify the idiosyncratic risks from sme lending, by lending to a broad enough range of firms. and it is only banks that have the relationship networks and screening veugelers, r. ( 2011 ), “ mind europe ’ s early - stage equity gap ”, bruegel policy contribution 2011 / 18, december 2011. bis central bankers ’ speeches and monitoring processes to manage the information asymmetries associated with smaller firms. for non - banks obtaining adequate information is