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The Bank Business Model in the Post-Covid-19 World the Future of Banking 2 the Covid-19 Pandemic Has Induced a Deep Global Economic Crisis

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The Bank Business Model in the Post-Covid-19 World the Future of Banking 2 the Covid-19 Pandemic Has Induced a Deep Global Economic Crisis The Bank Business Model in the Post-Covid-19 World The Future of Banking 2 World The Future Model in the Post-Covid-19 The Bank Business The Covid-19 pandemic has induced a deep global economic crisis. Yet, in the middle The Future of Banking of the financial turmoil over the past few months, banks were a source of resilience. Thanks to major reforms following the global financial crisis of 2007-2009, the much better capitalised and more liquid banks were not under immediate stress. In fact, 2 banks are seen as usefuk to support the real sector’s financing needs. But they will come under stress. Large-scale insolvencies among firms may arise. A wave of bankruptcies among households may follow. Banks could get caught up eventually, with stresses to exceed those envisioned in many tests. The effects from the crisis come on top of the combination over the past decade of persistently low interest rates, regulatory changes, and competition from shadow banks and new digital entrants that challenged the traditional bank business model The Bank Business pre-Covid-19. The report tackles these crucial challenges, examines the competitive responses of the different players – both incumbents and new entrants – and the associated policy and regulatory issues. It argues that: Model in the • In the short run, banks may enjoy a revitalisation of relationship lending as they channel funds to customers over the crisis and enjoy the protection of the safety net and access to deposit financing. Post-Covid-19 World • However, the Covid-19 crisis will accelerate pre-crisis tendencies as subdued growth and low interest rates will persist for a long time. It will test the resilience of the financial system, the regulatory reforms implemented after the global financial crisis, and the limits of central bank intervention. • While banks may enjoy temporary regulatory and supervisory relief, digitalisation will receive a large impetus, with new entrants challenging banks. Digitalisation will increase the contestability of financial services, but its long-term impact will depend on the market structure that prevails. Banking may move from the traditional oligopoly to a system with a few dominant platforms that control access to a fragmented customer base, with a few BigTech firms and some platform-transformed incumbents monopolising the interface with customers. • Medium-sized banks will suffer since they cannot manage the cost efficiencies and IT investment that are crucial in the new environment. Consolidation could be an escape route for stressed banks, but in the post-Covid-19 world, political obstacles to cross-border mergers may resurface as states become more protective Elena Carletti, Stijn Claessens, of their national banking champions, with banks considered strategic. Antonio Fatás and Xavier Vives • Regulators must adapt to digital disruption by balancing facilitating competition and allowing the benefits of innovation with protecting financial stability. In order to so, they must coordinate prudential regulation and competition policy with data policies, navigating complex trade-offs. Centre for Economic Policy Research ISBN 978-1-912179-34-3 33 Great Sutton Street • LONDON EC1V 0DX • UK TEL: +44 (0)20 7183 8801 • FAX: +44 (0)20 7183 8820 • EMAIL: [email protected] WWW.CEPR.ORG 9 781912 179343 The Bank Business Model in the Post‑Covid‑19 World The Future of Banking 2 Centre for Economic Policy Research Centre for Economic Policy Research 33 Great Sutton Street London EC1V 0DX UK Tel: +44 (20) 7183 8801 Fax: +44 (20) 7183 8820 Email: [email protected] Web: www.cepr.org ISBN: 978-1-912179-34-3 © 2020 Centre for Economic Policy Research The Bank Business Model in the Post‑Covid‑19 World The Future of Banking 2 Elena Carletti Bocconi University and CEPR Stijn Claessens Bank for International Settlements Antonio Fatás INSEAD and CEPR Xavier Vives IESE Business School and CEPR CEPR PRESS Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 1,500 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean Founder and Honorary President Richard Portes President Beatrice Weder di Mauro Vice Presidents Maristella Botticini Ugo Panizza Philippe Martin Hélène Rey Chief Executive Officer Tessa Ogden IESE Business School The 2018-2019 academic year marked the 60th anniversary of IESE Business School, the graduate business school of the University of Navarra. Founded in 1958 in Barcelona, IESE Business School is one of the world’s most international business schools, with campuses in Barcelona, Madrid, Munich, New York and São Paulo. Consistently ranked within the top ten worldwide, IESE has pioneered business education in Europe since its founding. For more than 60 years, it has sought to develop business leaders with solid business skills, a global mind-set and a desire to make a positive impact on society. In the last five years, IESE has been number one in the world for Executive Education programmes, according to the Financial Times ranking. About the authors Elena Carletti is Professor of Finance at Bocconi University and founder and Scientific Director of the Florence School of Banking and Finance at the European University Institute. She is a member of Board of Directors of Unicredit SpA and a member of the Advisory Scientific Committee of the European Systemic Risk Board (ESRB). She is also research professor at the Bundesbank, a member of the Expert Panel on banking supervision for the European Parliament, a member of the Scientific Committee “Paolo Baffi Lecture” at the Bank of Italy, a member of Bruegel Scientific Committee, Research Fellow at CEPR, and a Fellow of the Finance Theory Group, CESifo, IGIER, and Wharton Financial Institutions Center. Stijn Claessens is Head of Financial Stability Policy and Deputy Head of the Monetary and Economic Department at the Bank for International Settlements, and a CEPR Research Fellow. He represents the BIS externally in the FSB, BCBS and G20. Within the BIS, he leads policy-based analyses of financial sector issues and oversees the work of the CGFS and CPMI. Previously, he worked at the World Bank (1987-2006), the International Monetary Fund (2007-2014), and the Federal Reserve Board (2015-2017). He holds a PhD from the Wharton School of the University of Pennsylvania and a master's degree from Erasmus University, Rotterdam and taught at New York University and the University of Amsterdam. Antonio Fatás is the Portuguese Council Chaired Professor of Economics at INSEAD; Senior Policy Scholar at the Center for Business and Public Policy at the McDonough School of Business, Georgetown University; Research Fellow at the CEPR (London); and Senior Fellow at ABFER (Singapore). He received a Masters’ and Ph.D. in Economics from Harvard University. He has worked as an external consultant for the International Monetary Fund, the World Bank, the Board of Governors of the US Federal Reserve, the European Parliament, the OECD, and the UK government. His research interests are in the area of macroeconomics. Xavier Vives is Chaired Professor of Economics and Finance at IESE Business School. He is a Fellow of the Econometric Society since 1992, the European Economic Association since 2004; and the Academia Europaea since 2012. He was Duisenberg Fellow of the European Central Bank in 2015, and President of the European Association for Research in Industrial Economics for 2016-2018. He has recently published the book Competition and Stability in Banking and he is currently editor of the Journal of Economic Theory. In 2011-2014 he was Special Advisor to the EU Commissioner for Competition, Mr Joaquín Almunia, and until May 2020 he was Lead Independent Director of CaixaBank. v Acknowledgements The authors have benefited from the comments of the discussants of the report at the online conference on 1 April 2020, Thorsten Beck, Dirk Niepelt and Amit Seru, as well as the conference participants, with particular thanks to Mathias Dewatripont, Jean-Pierre Landau, Núria Mas, Loriana Pelizzon and Paola Sapienza. The online conference was hosted by the Florence School of Banking and Finance at European University Institute, for which we are very grateful. We also wish to thank Raphael Auer, Frederic Boissay, Patrick Bolton, Stephen Cecchetti, Torsten Ehlers, Christian Eufinger, Jon Frost, Leonardo Gambacorta, Tara Rice, Stefano Sacchetto and Hyun Song Shin for useful comments and joint work. David Rivero provided extremely useful input to the report, and Giulio Cornelli, Samir Kiuhan, and Giorgia Trupia provided excellent research assistance. Carlota Monner delivered very efficient general support. The views
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