Swissquote Conference 2016 on the Future of Banking

Banking business in Switzerland and worldwide is in transition. The European banking sector is still recovering from the aftermath of the Lehman Brothers default in 2008 and the European sovereign debt crisis. New regulatory frameworks such as Basel III and MiFID II put banks under scrutiny. Swiss specific challenges are the reform of the banking secrecy law, the Swiss finish of international regulation standards, and the extreme low and negative interest rate regime. Financial disintermediation and digitization and the emergence of FinTech companies put further pressure on traditional banking business margins but offer the potential for innovation and new banking business models.

The Swissquote Conference featured the latest research and insights on banking and finance provided by leading experts and scholars in the field. Steven Ongena from the University of Zurich and Swiss Finance Institute discussed latest findings on the strategic lending decisions that are made by banks when facing a negative funding shock, such as the one many banks experienced during the latest global financial crisis. He provided empirical evidence that banks reallocate credit within their domestic loan portfolio towards low-risk firms in sectors where they already have a high presence and where they are specialized. These reallocation effects are economically large. Guillaume Vuillemey from HEC Paris discussed why many European banks experienced funding dry-ups during the 2008-2014 period, while in aggregate there was no liquidity shortfall. Stijn Claessens from the Board of Governors of the Federal Reserve System gave an international overview of financial systems and the corresponding systemic risk sources. He highlighted the need of many countries for non-bank forms of financing, notably equity markets. Such a development would require extending the reach of macroprudential policies and ensuring more systemic oversight of non-bank markets. Jean-Charles Rochet from the University of Zurich and Swiss Finance Institute discussed the role of banks and banking regulation in steering the developed world towards a low carbon regime. This is notably a challenging task and calls for alternative means for policy makers to encourage more participation by banks to sustainable finance. Anjan Thakor from Washington University introduced an economic theory for how bank culture influences bank risk taking and incidents involving misrepresentation and fraud. These economic insights on bank culture can shape future bank regulatory policy and what regulators ought to think about as they contemplate ways to integrate bank culture into prudential regulation. Alan Morrison from the University of Oxford presented a model including ethical agents into an analysis of decision making in a profit-maximizing firm. He showed that cultural assimilation in financial services emerges as an equilibrium phenomenon. It highlights the importance of moral considerations, organizational culture, and compensation contracts in banks. Ben Robinson from Temenos gave an overview of the information technologies that are changing the banking industry and in what ways. He also discussed what banks need to do to withstand this threat and which is the route to banks being able to prosper in the digital age.

A panel discussion on the challenges and opportunities for the banking of the future addressed the impact of technology on universal banking and whether new stricter regulation had adverse consequences for bank lending. The main conclusions reached were that panelists were quite optimistic for the banking sector. They argued that FinTech would lead to substantial reductions in costs of banks and open new business areas to banks. At the same time, FinTech will not replace traditional banks. They will likely continue to play an important role because they have the banking clients and their trust, which are difficult to access and build for FinTech startups. Panelists were happy with the decisions to let FinTech develop in a lighter regulatory environment, but insisted that it should be regulated like banks are once the build-up phase is over. On the second question, panelists pointed out that tighter regulation will make banks safer and help restore trust in the financial sector. Also, surprisingly, there is relatively little evidence that the increase in capital requirements has constrained lending in a significant matter.

The conference featured seven presentations and a panel discussion. It attracted 126 participants, one third of which came from the financial industry and two thirds from academic institutions.

The conference was organized by the Swissquote Chair in Quantitative Finance and the Swiss Finance Institute at EPFL and sponsored by Swissquote and the Swiss Finance Institute.