Bankers agree that adaptation to competition by fintech firms in an environment of low profitability and risks associated with climate change are fresh challenges facing the eurozone banking system.
This was the message from Constantinos Herodotou, the Cyprus Central Bank Governor and Luis de Guindos, the ECB Vice President, told a banking conference held in Nicosia.
“Climate change is the next challenge for humanity for the next decade,” de Guindos said, addressing the 9th Banking Forum & FinTech Expo virtually.
He said Central Banks must contribute to addressing climate change and governments.
He noted that banks might be confronted with transition and physical risks in terms of financial stability.
“And we have to make sure that banks are ready to deal with those situations.”
De Guindos also noted that a climate stress test carried out by the ECB concluded: “the sooner we act on this climate risk, the better in the medium term.”
On rising inflation, as Europe emerges from the 2020 pandemic downturn, de Guindos said it would start to decline at the beginning of next year.
“In the second half, it will start to decelerate even more and will converge to our target of 2%.”
He acknowledged that some persistent issues associated with supply-side bottlenecks are the reason why the decline of the inflation rate “will not be as quick and as rapid as we forecasted some months ago and perhaps the convergence towards the 2% target will take a little bit longer.”
Herodotou said the banks should adapt to the new environment created by the rising competition by non-banks financial intermediaries and fintech companies.
The COVID pandemic highlighted the importance of technology.
“The euro area banking sector is undergoing a transformation, with higher competition from non-bank financial intermediaries and Fintech institutions.”
He said the euro area’s financial structure had seen a movement from strong bank dominance towards a more balanced composition, as the development of non-bank lending diversifies the sources of finance available to businesses, providing competition to the banking sector.
“As a result, credit institutions need to adapt to the unfolding competitive landscape.
“The low profitability challenge that European banks face exacerbates the need to adjust and acts as a catalyst for the already strong competition banks are experiencing from Fintech and the non-bank financial intermediation firms.
“The banking system needs to adapt.
“Incumbent banks that work with dated technologies and overextended branch networks are likely to lose their competitive edge.
“Technological innovation is the way to increase efficiency as a result of new competitors entering the market and new generations being more reliant on technology.”
