erkki liikanen : banking after the regulatory reforms – business as usual? speech by mr erkki liikanen, governor of the bank of finland and chairman of the highlevel expert group on the structure of the eu banking sector, at the bank of finland suerf conference, helsinki, 13 june 2013. * * * slides ( ppt ) slides ( pdf ) on the size and structure of the banking sector [ page 1 : on the size and structure of the banking sector ] research findings before the financial crisis, the consensus view from the finance and growth research was that financial development not only follows economic growth but contributes to it. 1 however, after the financial crisis, the other side of the financial sector growth has received increasing attention. now it is recognised that before the crisis, the financial sector had grown to quite massive proportions in many countries. and at the same time, the sector had become more and more concentrated as the biggest institutions had increased their market share. [ page 2 : rapid growth in the eu banking sector ] let me start with the benign view of the financial sector expansion, and the emergence of increasingly large banks, that prevailed before the crisis. the main point in the benign story is that growth of the financial sector improves overall economic growth opportunities by mobilising resources to finance investment projects and by facilitating risk management. 2 the key assumption is that a well developed financial system helps allocate productive resources more efficiently, both by channelling funds to growth sectors and by pulling resources from declining ones. at the level of individual financial institutions, the growth of bank balance sheets was seen as reflecting increasing returns to scale and scope from combining a wide variety of financial services and providing them also cross - border to internationally active clients. however, the events of the financial crisis have led us to also consider the malign diagnosis of the massive size of the financial sector and of the single financial institutions that dominate the banking sector. some recent research at the bis suggests that finance does indeed contribute to economic growth but only up to a point. 3 a too large financial sector may imply too high risk - taking, which results from over - investment and too much leverage in some sectors of the economy, typically the real estate related sector. this increases the frequency of crises which involve levine ( 2005 ), finance and growth : theory and evidence, in handbook of economic growth, edited by aghion and durlauf king and levine ( 1993 ), finance and growth, schumpeter might

service, where heavy fixed costs allow economies of scale with relatively low marginal operating costs. old legacy systems may not provide a viable platform for new requirements coming from the single euro payments area or new payment instruments. during a period of low interest rates banks cannot cross - subsidise payment services from other revenue sources. at the same time, end - customers are not willing to pay for paying. the equation is quite difficult. banks are obviously asking themselves the very relevant question whether it is worthwhile to invest and maintain this type of processing capabilities, or should they be outsourced or bought from companies which are specialized in processing. should banks not concentrate in what they know best : customer relationship and risk management? bis central bankers ’ speeches drivers of change in payment services main characteristic of payment services is the two - sidedness : in order to provide payment services, both the payer and the payee must participate in the same network. payment cards need to be issued and merchants need to accept the card in their payment terminal to enable card payments. this type of network requires co - operation between service providers. at the same time, we want to see competition in services provision. competition gives incentives to streamline processing of payments and to service innovation. the competition takes place in the customer interface, whereas the efficient processing of payments needs co - operation for standards and security. other driving forces of payments development are changing demographics, changing customer demand and integration. i mentioned earlier that banks have not met customer demand for internet or mobile payments or real - time payments. i know that cards are heavily used when paying in web shops, but that is not what cards were designed for. there are initiatives for improved security for card payments in the internet, but there is still room for improvement there. mobile payments have been of high expectations but nothing much in reality. some jurisdictions have created real - time payment systems, but mainly with support from the public authorities. european regulation aims to open the competitive market by allowing payment institutions to provide payment services. there is a lot of talk about big data, mining the payments data for better customer relationship management. banks have a strong position keeping customers ’ accounts, but if they are not sensitive to the changing customer demand, they may well lose the momentum. there is a finnish study showing that 95 % of people between ages 16 – 65 use internet regularly and 53 % of people between 65 and 74 years do so as well. the majority of payments in shops are made with cards. aging population