Why bundesbank is wrong

This becomes particularly apparent when credit volume increases substantially in relation to gross domestic product.

A further indicator of an inflated system is an excessively rapid expansion of bank balance sheets in relation to national GDP. Back in , the European Systemic Risk Board, or ESRB , stated that the European banking sector had ballooned since the s and that the majority of this unhealthy growth was concentrated in the largest banks. Until , for example, we observed in Europe both a speedy increase in credit and an expansion in balance sheets, which progressed just as quickly.

Bearing this in mind, the balance sheet reduction since has been rather modest. Against the backdrop of the rapid increase since the early s, the reduction was absolutely necessary and is probably far from being completed. Hence, the picture is clearer in terms of the excessive size of the banking sector than when it comes to the question of whether competition is too high or too low.

Europe remains overbanked. Although Austria and Germany are not among the countries to have seen strongest growth in the banking sector, both have recorded fairly large expansion. Now, you might argue that this growth is economically justified as it is the response to heightened real economic demand.

The higher volume would then cause economic productivity to increase. Recent studies do indeed grapple with this difficult issue. In the US sector, there are initial signs that the massive growth since the s is actually attributable to secondary trading activities that are of little use to the economy.

What's more, the productivity of financial services seems to have improved only marginally since This means, therefore, that the increases in efficiency made possible by the IT revolution were primarily used to make such trading activities more profitable. Increases in the efficiency of simple bank services, on the other hand, were fairly small. In other words, while large-scale proprietary trading was carried out profitably until , the simple issuing of new bonds is not much more efficient today than it was in John Pierpont Morgan's days at the start of the last century ….

It is rather a question of guiding the light of the streetlamp under which we are searching to the right place, or in this case, to light a broader area — we are searching for the reasons behind the malaise of our banks and savings banks.

Until now the beam has been too focused upon their failure to adapt their business models. But maybe we won't find the key under this beam of light at all, because we lost it much earlier somewhere else.

Maybe the answer is that the banking sector has simply grown too large. This is what I think is important: market consolidation does not necessarily mean that there should be fewer small banks and fewer savings banks, or that there should be no more branches. It may indeed be the case that many smaller institutions cannot hold their ground, or even that some branches prove unsustainable.

But it may equally be the case that downsizing is healthy for some larger institutions, and that a fintech competitor provides some services more efficiently and better. To put it simply, competition between institutions will establish which business areas and what structure will no longer be needed in the long term.

In this context, fixating on high profitability rates constitutes a problem. Was this not the exact problem we encountered prior to the financial crisis? Higher yields through aggressive balance sheet expansion, which is the strategy some institutions choose, seems questionable to me.

In the past, such fast growth has not been of a sustainable nature, and to me it is, in fact, an expression of strategic perplexity. On the other hand, the situation is different when it comes to conservative returns. As a supervisor I am keen to see that an institution is capable of surviving in the long term. This means that an institution must have reserves for hard times. These must, of course, be generated when times are good.

Thus for me, it is not a question of having especially profitable institutions. Profitability is only a means to an end. Returns must, however, be sufficient to assure future resilience, in other words to meet capital requirements and to cover the cost of equity. To this end, banks must also improve their market funding. Summed up, the ratio of yield to risk must be right.

This is what interests supervisors; everything else is up to the market. Have we taken the lessons learned from the financial crisis seriously, and have we been rigorous enough in our interventions?

What more do the individual market players need to do? I am convinced that institutions must develop business strategies which generate income without inflated balance sheets. Thus they need to become more efficient in order to eventually increase economies of scale on the cost side. On the revenue side, core competencies should be identified and utilised to earn money. For institutions with interest-heavy business models this means, first and foremost, finding strategies to adapt to the low-interest-rate environment, which is likely to continue for some time to come.

For policymakers and supervisors, it means that the political support for the banking sector must finally end — unfortunately, I see only limited signs of this so far.

This makes it all the more important to push ahead with concluding the post-crisis reforms. We should finish implementing Basel III by the end of this year, and end the preferential regulatory treatment of government bonds in the medium term. Much speaks in favour of advancing the capital markets union in order to strengthen the capital markets as an addition to the banking system. Most importantly, we cannot deny the existence of structural deficits in the banking sector.

Ladies and gentlemen, the credit institutions of Europe as well as those of Austria and Germany have made considerable progress since the financial crisis.

However, they are insufficiently armed at the current juncture to survive the challenges of the new economic age. As this age dawns, banks and savings banks must adapt their business models to the prevailing conditions if they want to avoid suffering the same fate as the dinosaurs.

Addressing legacy problems and realigning business models will not be enough. The sector must, in fact, prepare for its share of national accounts to shrink further. The systemic clean-up process, unavoidable following the bursting of the financial bubble, is not yet complete. However, we should not confine this discussion to simply saying "there should be fewer institutions and fewer branches".

A further increase in the market power of large banks is not the perfect solution. Instead the focus should be on shrinking the sector to a size required by the real economy, a sustainable size. Market players must decide on how to eliminate overcapacities. Claessens, Stijn and Laeven, Luc : What drives bank competition? Some international evidence. Journal of Money, Credit and Banking 36 3 : Dombret, Andreas : Digitalisation — repercussions for banks and their supervisors.

Koetter, Michael : Market structure and competition in German banking. Modules I and IV. Phillippon, Thomas : Has the US finance industry become less efficient? On the theory and measurement of financial intermediation.

American Economic Review 4 : Homepage Press Speeches. Are there too many banks? Direkt zum Inhalt. A Online payment model Content partially fee-based. Paolo Valentino. Alexandre Counis. Become an FT subscriber to read: Why the Bundesbank is wrong Leverage our market expertise Expert insights, analysis and smart data help you cut through the noise to spot trends, risks and opportunities.

Join over , Finance professionals who already subscribe to the FT. Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT. For 4 weeks receive unlimited Premium digital access to the FT's trusted, award-winning business news. Digital Be informed with the essential news and opinion.

Delivery to your home or office Monday to Saturday FT Weekend paper — a stimulating blend of news and lifestyle features ePaper access — the digital replica of the printed newspaper. Team or Enterprise Premium FT. Pay based on use.