new regulatory framework for banks freddy van den spiegel
DESCRIPTION
De presentatie van Freddy Van den Spiegel voor het financiëel forum van 27 sept in Gent.TRANSCRIPT
- 1. Freddy Van den Spiegel Vrije Universiteit Brussel Economic Advisor BNP Paribas Fortis The new regulatory framework for banks, and its consequences. Financieel Forum Gent, 27 september 2011
2.
- Identified weaknesses of the financial system.
- Is the regulatory response the right answer?
- - ultimate effect
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- Ultimate effect.
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- Dangerous strategies of banks.
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- Weak capital basisclear improvement.
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- From 8 to 2%back to 8%.
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- The never ending story of innovative instrumentsgone?
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2. Is the regulatory response the right answer? ultimate effect. 4.
- Ultimate effect.
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- Dangerous strategies of banks.
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- Weak capital basis.
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- No concern about liquidityclear improvement.
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2. Is the regulatory response the right answer? ultimate effect. 5.
- Ultimate effect.
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- Dangerous strategies of banks.
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- Weak capital basis.
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- No concern about liquidity.
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- Extreme leverageis the leverage ratio addressing the problem?
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2. Is the regulatory response the right answer? ultimate effect. 6.
- Ultimate effect.
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- Dangerous strategies of banks.
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- Weak capital basis.
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- No concern about liquidity.
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- Extreme leverage.
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- Dependence on wholesale fundingrisk partly mitigated through liquidity rules.
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2. Is the regulatory response the right answer? ultimate effect. 7.
- Ultimate effect.
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- Dangerous strategies of banks.
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- Weak capital basis.
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- No concern about liquidity.
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- Extreme leverage.
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- Dependence on wholesale funding.
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- Poor risk management.
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- Nave belief in modelsbetter models as solution?
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- stress tests and scenario analysis OK.
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- Can banks be serious about risk?Remains a delicate issue.
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2. Is the regulatory response the right answer? ultimate effect. 8.
- Ultimate effect.
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- Dangerous strategies of banks.
-
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- Weak capital basis.
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-
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- No concern about liquidity.
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- Extreme leverage.
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- Dependence on wholesale funding.
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- Poor risk management.
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- Poor governance .
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- Role of boardsstill unclear.
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- Wrong incentives (bonuses)improvements.
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2. Is the regulatory response the right answer? ultimate effect. 9.
- Ultimate effect.
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- Dangerous strategies of banks.
-
-
- Weak capital basis.
-
-
-
- No concern about liquidity.
-
-
-
- Extreme leverage.
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- Dependence on wholesale funding.
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- Poor risk management.
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- Poor governance.
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- Aggressive growth strategieswill come back sooner or later.
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2. Is the regulatory response the right answer? ultimate effect. 10.
- Ultimate effect
-
- Dangerous strategies of banks.
-
-
- Weak capital basis.
-
-
-
- No concern about liquidity.
-
-
-
- Extreme leverage.
-
-
-
- Dependence on wholesale funding.
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- Poor risk management.
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- Poor governance.
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- Aggressive growth strategies.
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- Increasing complexity/opaquenesssome aspects tackled .(resecuritisation)
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2. Is the regulatory response the right answer? ultimate effect. 11.
- Identified weaknesses of the financial system.
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- Dangerous strategies of banks.
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- Poorly designed regulatory/supervisory framework.
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- Pro-cyclicality of Basel II and fair value, model driven, external ratings driven, nave belief in banksno fundamental shift. Some improvements like anti-cyclical buffers if implemented.and trading book
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2. Is the regulatory response the right answer? ultimate effect. 12.
- Identified weaknesses of the financial system.
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- Dangerous strategies of banks.
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- Poorly designed regulatory/supervisory framework.
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- Pro-cyclicality of Basel II and fair value.
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- Poor supervisory framework.
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- Forbearance and capturenot tackled.
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- No cross border framework (even in EU)improvement with EBA, but still weak.
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2. Is the regulatory response the right answer? ultimate effect. 13.
- Identified weaknesses of the financial system.
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- Dangerous strategies of banks.
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- Poorly designed regulatory/supervisory framework.
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- Pro-cyclicality of Basel II and fair value.
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- Poor supervisory framework.
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- No stability supervisionESRB should be the answer, benefit of the doubt, and remains undiscovered territory.
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2. Is the regulatory response the right answer? ultimate effect. 14.
- Identified weaknesses of the financial system.
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- Dangerous strategies of banks.
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- Poorly designed regulatory/supervisory framework.
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- Pro-cyclicality of Basel II and fair value.
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- Poor supervisory framework.
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- No stability supervision.
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- No crisis managementframework to be developed.
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2. Is the regulatory response the right answer? ultimate effect. 15.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
16.
- BCBS 12 September 2010
17.
- The international legislative process.
- BCBS 12 September 2010 final agreement.
- Capital requirements: gradual increase until 2019.
- Capital conservation buffer: up to 2.5%.
- Supplementary capital for systemic banks: TO DO.
- Counter cyclical buffer: TO DO.
- Leverage ratio: 3%, hard rule from 2018.
- Liquidity rules: hard rule from 2018.
- And supervisors can go beyond the requirements in Pillar 1 or Pillar 2
The new framework. 18.
- BCBS 12 September 2010 agreement.
- Capital requirements: gradual increase until 2019.
- Capital conservation buffer: up to 2.5%.
- Countercyclicalbuffer: TO DO.
- Supplementary capital for systemic banks: TO DO.
- Leverage ratio: 3%, hard rule from 2018.
- Liquidity rules: hard rule from 2018.
- Criticism
- Too little too slow.
- Will hurt the real economy: need for impact assessments.
The new framework. 19.
- McKinsey.
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- EU banks require 1000 bn equity (50%).
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- EU banks require 3000 bn long term funding (50%).
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- ROE down 4%.
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- Impact depends on business line.
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- Retail OK.
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- Trading NOK.
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- Trade finance NOK.
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Impact on banks and economy. 20.
- IIF study.
- Cost of lending: +1%.
- Capital requirements (core tier 1): + 1000 bn.
- GDP: - 4.4%.
- Employment: - 5 million.
- BIS study.
- Direct impact on GDP negligible.
- Overall impact positive because of more stability.
- The problem of orderly deleveraging
- The difficulty to take into account the vulnerable macro environment .
Impact on banks and economy. 21. 22. Banks exposure to non-domestic Eurozone periphery (Greece, Spain, Portugal, Italy), sovereign and private sector debt, in % of GDP Banking contagion channel: exposure to sovereign and private sector debt 23. 24. 25.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
- Issues beyond Basel III.
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- - cross border banking
26.
- Agreement about the need of consolidated supervision.
- But requirements also to be fulfilled at sub consolidated and solo level: risk. of inconsistency between solo and consolidated level.
- Cooperation between supervisors in colleges, but with which competence?
- Specific EU problem .
The future of cross border banking. 4. Issues beyond Basel III. 27.
- Specific EU problem.
- Integrated financial market as a political goal inconsistent with supervision at member state level.
- Freedom of establishment and free delivery of services as basic principles: means no supervision by host countries for branches, even if systemically relevant.
- Even for subsidiaries limited competence for host supervisors: risk models approved by home supervisor of group.
- Capital add ons at sub-level (Pillar 1 or Pillar 2)?
- Member states focused on national interest, given experience with crisis: ring fencing?
- Complicated political compromises as a consequence:
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- Colleges get legal basis and role.
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- New EU supervisory authority (EBA) empowered in case of disagreement between involved supervisors?
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- Risk of getting back to fragmentation.
- Impact on cross border banking in EU.
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- Cross border organization.
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- Incentive for cross border banking?
The future of cross border banking. 4. Issues beyond Basel III. 28.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
- Issues beyond Basel III.
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- -cross border banking
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- - systemic banks
29.
- Definition
- Systemic banks are banks which, if they fail, could bring the whole financial system down.
- Are not allowed to fail, which creates moral hazard and competitive distortions.
- too big to fail, size but also other criteria:
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- infrastructure function (public utility).
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- interconnectedness.
- Not only banks, also other financial institutions and even non-financial institutions (IT).
- Also small banks can become systemically relevant (Northern rock).
- Useful/indispensable in the financial system?
- Importance of systemic banks in the EU.
What about systemic banks? 4. Issues beyond Basel III. 30.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
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- proposals of King, Turner, Geithner, Dodd-Franck,
What about systemic banks? 4. Issues beyond Basel III. 31.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
What about systemic banks? 4. Issues beyond Basel III. 32.
- Limit interconnectedness?
- Internally: cross border group organized as a chain of autonomous subsidiaries. But impact on financial integration.
- Externally: by means of clearing houses, netting, etc.
What about systemic banks? 4. Issues beyond Basel III. 33.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
- Public utility?
What about systemic banks? 4. Issues beyond Basel III. 34.
- Public utility?
- Systemic banks are like public utilities: zero risk tolerance.
What about systemic banks? 4. Issues beyond Basel III. 35.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
- Public utility?
- Narrow banking?
What about systemic banks? 4. Issues beyond Basel III. 36.
- Narrow banking?
- Big banks with retail deposits should only engage in traditional, simple activities: deposits and loans.
- US: Dodd- Frank act: softly back to Glass Steagall.
- Still possible given economic complexity?
- Who will provide international financial services, given globalization?
- simple activities are not always risk free (example S&L).
- Diversified activities lead to better risk diversification .
What about systemic banks? 4. Issues beyond Basel III. 37.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
- Public utility?
- Narrow banking?
- Supplementary capital requirements?
What about systemic banks? 4. Issues beyond Basel III. 38.
- Supplementary capital requirements?
- More capital to compensate for risk of too big to fail.
- Does not address real problem.
- Role of Cocos?
What about systemic banks? 4. Issues beyond Basel III. 39.
- Definition
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness
- Public utility?
- Narrow banking?
- Supplementary capital requirements?
- Living wills?
What about systemic banks? 4. Issues beyond Basel III. 40.
- Living wills?
- Systemic banks must be better prepared for occasional problems: need for contingency plan and resolution plan.
- Solution for too big to fail problem if realistic.
- Can improve discipline to avoid excessive complexity of groups.
- Can potentially be administratively burdensome and theoretical solution.
What about systemic banks? 4. Issues beyond Basel III. 41.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
- Public utility?
- Narrow banking?
- Supplementary capital requirements?
- Living wills?
- Supplementary taxation/levy?
What about systemic banks? 4. Issues beyond Basel III. 42.
- Supplementary taxation/levy?
- too big to fail is reality. The implicit guarantee of the government has to be compensated?
- Is popular given financial situation of governments.
- But increases moral hazard .
What about systemic banks? 4. Issues beyond Basel III. 43.
- Definition.
- too big to fail: not allowed or stricter regulation/supervision?
- Limit interconnectedness.
- Public utility?
- Narrow banking?
- Supplementary capital requirements?
- Living wills?
- Supplementary taxation?
- NO EASY ANSWERS.
What about systemic banks? 4. Issues beyond Basel III. 44.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
- Issues beyond Basel III.
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- - cross border banking
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- - systemic banks
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- - Macro prudential supervision
45.
- Global level:FSB/IMF
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- International agreements?
- US: Financial stability oversight council
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- monitoring, regulatory binding recommendations, define systemic institutions
- EU: European Systemic Risk Board
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- (binding?) recommendations
- Member states
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- Diversity
Organization of systemic risk supervision 46.
- (binding) recommendations.
- taxation.
- Monetary policy.
- Micro prudential supervision.
- Market organisation and functioning
- Capital controls
- Any instrument if enforced by law.
- IN THEORY EXTREMELY POWERFUL BUT A HUGE RESPONSIBILITY
Tools and instruments of systemic risk supervision 47.
- How to tackle global imbalances/geopolitical issues
- How to identify dangerous developments?
- The danger of interventions (unintended consequences).
- How to decide if conflicting objectives?
- Democratic deficit/national reaction if recommendation from supranational level.
- Impact on growth.
- How to monitor the non regulated sector?
- Cordination at global level?
- Cordination within EU (monetary politicy, stability pact, ESRB, treaty, member states/EU)?
- Legal certainty.
- EXTREEM MORAL HAZARD IF SUCCESFUL.
Challenges for systemic risk supervision. 48.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
- Issues beyond Basel III.
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- - cross border banking
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- - systemic banks
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- - Macro prudential supervision
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- - a very long list
49.
- The issue of cross border banking
- The issue of systemic banks
- New IFRS rules.
- Better governance
- Rating agencies.
- Hedge funds/ alternative investment vehicles/shadow banking.
- Financial infrastructure: clearing/settlement.
- Organisation of prudential supervision.
- Organization of stability supervision (macro-prudential).
- Role of deposit guarantee schemes.
- Organization of early intervention and crisis management. Bail-out/bail-in?
- Taxation on financial transactions/institution.
- Normalization (reprivatisation) of banking.
4. Issues beyond Basel III 50.
- Identified weaknesses of the financial system.
- Ultimate effect of the new regulation.
- The difficult transition and broader economic impact.
- Issues beyond Basel III.
- Banks in the new environment.
51.
- The difficult transition to normal
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- Exit of government support
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- Exit of central bank support
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- Find new equity
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- Find liquidity
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- CHANGE OR GET SQUEEZED
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- While markets remain vulnerable (sovereign risk)
5. Banks in the new environment. 52.
- The difficult transition to normal
- The new mathematics of sustainability
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- ROE: 8 10%?
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- Growth potential: 4%
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- Asset growth 4%
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- Annual equity need 4%
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- Dividend max 4%
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- As a consequence, price book value to stick at 1
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- HOW TO GET OUT OF THIS UNATTRACTIVE COMBINATION?
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5. Banks in the new environment. 53.
- The difficult transition to normal
- The new mathematics of sustainability
- How to improve the mathematics?
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- Cost cutting, the natural reaction
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- Clear choices in strategy: geography/activity/customer
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- The end of the European universal bank?
5. Banks in the new environment. 54.
- The new regulatory framework: the good, the bad and the ugly
- The transition will be difficult and bumpy because uncoordinated, and given the macro environment
- There is no clear picture about which banking system we want, a dangerous experiment
CONCLUSIONS 55.
- THANK YOU