Barcelona 2: The Bank Business Model in the Post-Covid-19 World

The Future of Banking The Covid-19 pandemic has induced a deep global economic crisis. Yet, in the middle of the financial turmoil over the past few months, banks were a source of resilience. Thanks to major reforms following the global financial crisis of 2007-2009, the much better capitalised and more liquid banks were not under immediate stress. In fact, banks are seen as usefuk to support the real sector’s financing needs. But they will come under stress. Large-scale insolvencies among firms may arise. A wave of bankruptcies among households may follow. Banks could get caught up eventually, with stresses to exceed those envisioned in many tests. The effects from the crisis come on top of the combination over the past decade of persistently low interest rates, regulatory changes, and competition from shadow banks and new digital entrants that challenged the traditional bank business model pre-Covid-19. The report tackles these crucial challenges, examines the competitive responses of the different players – both incumbents and new entrants – and the associated policy and regulatory issues. It argues that:• In the short run, banks may enjoy a revitalisation of relationship lending as they channel funds to customers over the crisis and enjoy the protection of the safety net and access to deposit financing.• However, the Covid-19 crisis will accelerate pre-crisis tendencies as subdued growth and low interest rates will persist for a long time. It will test the resilience of the financial system, the regulatory reforms implemented after the global financial crisis, and the limits of central bank intervention. • While banks may enjoy temporary regulatory and supervisory relief, digitalisation will receive a large impetus, with new entrants challenging banks. Digitalisation will increase the contestability of financial services, but its long-term impact will depend on the market structure that prevails. Banking may move from the traditional oligopoly to a system with a few dominant platforms that control access to a fragmented customer base, with a few BigTech firms and some platform-transformed incumbents monopolising the interface with customers.• Medium-sized banks will suffer since they cannot manage the cost efficiencies and IT investment that are crucial in the new environment. Consolidation could be an escape route for stressed banks, but in the post-Covid-19 world, political obstacles to cross-border mergers may resurface as states become more protective of their national banking champions, with banks considered strategic.• Regulators must adapt to digital disruption by balancing facilitating competition and allowing the benefits of innovation with protecting financial stability. In order to so, they must coordinate prudential regulation and competition policy with data policies, navigating complex trade-offs.The Bank Business Model in the Post-Covid-19 World The Future of Banking 2Centre for Economic Policy Research33 Great Sutton Street • LONDON EC1V 0DX • UKTEL: +44 (0)20 7183 8801 • FAX: +44 (0)20 7183 8820 • EMAIL: CEPR@CEPR.ORGWWW.CEPR.ORG9781912179343ISBN 978-1-912179-34-32 The Bank Business Model in the Post-Covid-19 WorldElena Carletti, Stijn Claessens, Antonio Fatás and Xavier Vives The Bank Business Model in the Post‑Covid‑19 WorldThe Future of Banking 2 Centre for Economic Policy ResearchCentre for Economic Policy Research33 Great Sutton StreetLondon EC1V 0DXUKTel: +44 (20) 7183 8801Fax: +44 (20) 7183 8820Email: cepr@cepr.orgWeb: www.cepr.orgISBN: 978-1-912179-34-3© 2020 Centre for Economic Policy Research The Bank Business Model in the Post‑Covid‑19 WorldThe Future of Banking 2Elena CarlettiBocconi University and CEPRStijn ClaessensBank for International SettlementsAntonio Fatás INSEAD and CEPRXavier VivesIESE Business School and CEPRCEPR PRESS Centre for Economic Policy Research (CEPR)The Centre for Economic Policy Research (CEPR) is a network of over 1,500 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers.CEPR’s guiding principle is ‘Research excellence with policy relevance’.A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society.CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report a