.

of credit risks.

      This scenario is exacerbated by increasingly evident negative sideeffects of the European Central Bank’s monetary policy. Inevitably, the low interest environment that has prevailed for many years has led to investment decisions with more pronounced risk exposure than would have been the case in a normal interest rate situation at least among professional market players such as insurers, pension funds and banks who are under pressure to earn returns themselves.

      Not only the economic situation, the strong growth in nonperforming loans and the poor earnings situation but also persisting cost inefficiencies and overcapacities will mean that the returns on equity of banks in the Eurozone, which are already relatively low, will face further pressure. In the event that returns on equity fall below the cost of capital for a significant period, there is a risk that the capital market will no longer be prepared to finance banks as only banks which are sustainably profitable are also stable banks. And what about supervision? International financial markets and banking regulatory authorities have already made significant preparations for this situation. Examples include the developments outlined below:

      1. Through efforts including the completion of the Banking Union, the European Central Bank is attempting to establish a supervisory institution covering the entire market with a joint deposit guarantee system. The idea behind this approach is to control cross-border systemic risks especially faced by system-relevant banks via a uniform European supervisory system, the Single Supervisory Mechanism (SSM) and to avoid risk clusters which would pose hazards in the event of a financial crisis.¹

      2. The German supervisory authority (Federal Financial Supervisory Authority, BaFin) already identified the hazard of cyclical systemic risks in 2019. In order to avoid excessive restrictions on the provision of loans in economic stress phases and to reduce a possible procyclical effect of the banking system on the real economy, BaFin called upon German banks to activate a countercyclical capital buffer and to raise this buffer to 0.25 percent of risk-weighted exposure to domestic loans.²

      However, the regulations issued by international financial market and banking regulatory authorities have not been harmonized to date. In this context, a key challenge is regulatory arbitrage, which not only includes avoiding regulatory requirements by interpreting the scope of regulations but also the activities of the private credit funds, hedge funds and various special-purpose financing vehicles grouped together under the heading of shadow banking. These shadow banks avoid the stringent capital and liquidity requirements that apply to banks, operate outside the close monitoring of supervisory authorities and still perform functions similar to banks.³

      The review initiated by the Trump administration of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), a key element in US banking regulation, shows how influential banking regulation can be. The Dodd-Frank Act overhauled financial regulation following the financial crisis of 2008/2009 and subjected it to stricter rules.⁴ However, the position of the Trump administration was that the Dodd-Frank Act was connected with over-regulation as lending by banks was (allegedly) restricted and the associated goal of avoiding future crises in the financial sector could only be achieved by accepting massive sacrifices in terms of economic growth. The regulatory measure as a whole was therefore regarded as too restrictive and was eased.⁵

      The amendments adopted in 2018 raised the threshold at which a bank was deemed too important to fail, and was therefore subject to stricter supervision, from a balance sheet total of $50 billion to $250 billion. In addition, the rules on trading, lending and capital for banks with total assets of less than $10 billion were relaxed. An assessment of these changes would be beyond the scope of this book but it is clear that the amendment of the Dodd-Frank Act can be seen as a deregulation of US banking supervision with the political motivation of creating significantly better competitive conditions for American banks.⁶

      In summary, it can be stated that the global recession as a result of the COVID-19 pandemic and the zombification of the economy pose a tremendous risk, at least for the European financial system. The dramatic economic slump and the attendant abrupt rise in risk premiums will hit the global financial system hard despite the international improvement in minimum regulatory standards and equity requirements. In the worst case, this could lead to a run on the banks and/or far-reaching market consolidation.⁷

      These developments are combined with a disruption, the contours of which are becoming increasingly clear, which will call the banking sector as a whole into question. This is a change with farreaching structural consequences, the threat to the banking value stream posed by the BigTechs. Major international technology groups such as Google (USA) or Alibaba (China) are now targeting the heart of value creation in banking with their online payment services. BigTechs are increasingly gaining a foothold in the financial services market and are offering their gigantic user base more and more financial services, with the traditional banks assuming the role of service providers.

      Even though the financial services business is not a core activity of the BigTechs, it is only a matter of time before a major technology company launches a scalable banking offering individualized for millions of customers in all the major banking segments with a cost base which is dramatically below the average in the sector. Customers will rapidly use the platforms of the BigTechs as a starting point for all their banking services instead of going to their traditional bank in order to purchase these services. When the direct connection with the customer is cut, some banks will become white label platforms while others will no longer be needed at all.

      As yet, banks are still protected against this disruption by a) the regulations governing banking, which are rather complex, b) the extremely pronounced consumer and data protection requirements of many countries and finally c) the fact that the financial services sector is still strongly dependent on national regulatory frameworks, which pose extremely high obstacles and apparently insurmountable barriers to market entry. However, it is only a question of time before consumers, with their convenient everyday relations with the BigTechs, generate the necessary demand, especially since the customer acquisition costs of the BigTech platforms are low as a result of digitalization and big data analyses and they can relatively easily meet the banking requirements of these customers.⁸

      Customers are highly familiar with and also rather trusting towards the major technology companies. As yet, severe data protection infringements, such as the disclosure by Facebook of large quantities of customer data to the data analysis company Cambridge Analytica, have not adversely affected their popularity with customers, at least not permanently.⁹ The sheer market dominance of the big technology companies must also be considered. Almost every modern mobile phone is equipped with software either from Google (Android) or from Apple (iOS). This means that almost every mobile device can be reached by Google and Apple as a platform. With the establishment of a mobile payment application and the integration of this function in their own operating systems, Apple and Google could directly target their own gigantic customer base with a banking service.

      The margin pool that can be tapped by them is certainly not the decisive criterion for the development of services of this type by the BigTechs. More important for them is the fact that they would gain almost complete control over their customers’ data. Companies who are familiar with the regular payments of their customers also have information on interdependencies and contract conditions and can target these relationships in a tailor-made, individualized way. There is virtually no limit to the possibilities.

      A direct consequence of this development would be a massive loss of customers by the banks; small banks would practically become superfluous,¹⁰ as the number of technology-averse customers who appreciate the vicinity of their local savings bank or cooperative bank branch will continue to fall and will become insignificant at some time in the future. There are many indications that the breakthrough of this disruption is becoming increasingly probable: Goldman Sachs is cooperating with Apple for credit card business¹¹, and Facebook has announced the introduction of a cryptocurrency (Libra) in partnership with a number of major banks and other organizations.

      However, this disruption has