Category: Bank

Categories
Bank Economical and financial crisis

Monetary policy facing its limits in a highly uncertain world

The ECB is now bound to a stance of vigilant patience. It significantly lowered its rates from June 2024 to June 2025 and could hardly go much further without risking the resurgence of financial imbalances, even as inflation hovered around 2% on average in the euro area. In a context now marked by war in the Middle East, strongly affecting energy prices and supply chains, uncertainty about the inflation path has re-emerged. At the same time, the constraints on growth in the euro area remain primarily structural. Monetary policy can smooth cycles, but on its own it cannot compensate for the lack of reforms and the necessary efforts to establish the conditions for Schumpeterian growth that raise potential output.

With the Volcker turn at the very end of the 1970s, both theory and practice assigned monetary policy a primary objective: price stability. The idea that central banks could finely tune the inflation-unemployment trade-off was largely discredited by the experience of the 1970s–1980s: a “stop-and-go” regime in which unemployment did not fall while inflation persisted.

With the profound transformation of the global economic and financial environment during the 1980s and 1990s—which ushered in a regime of low inflation thanks to the globalization of the real and financial economy and to the technological revolution—central banks were able, from the 1990s until the global financial crisis, to pursue policies supportive of growth.

However, the return and strengthening of financial cycles—asset price bubbles (in equities and real estate) and excessive indebtedness, followed by abrupt corrections—have shown that controlled inflation does not in any way guarantee financial stability. Persistently low interest rates can encourage excessive risk-taking and fuel imbalances that are difficult to unwind.

Hence the emergence, after 2008, of a framework in which central banks must safeguard multidimensional stability: inflation, growth, and financial stability. After the global financial crisis and during the pandemic, central banks cut rates to zero—indeed into negative territory in the ECB’s case—and made massive use of quantitative easing to compress long-term rates and risk premia, and to avoid deflation and depression. These policies were effective in acute phases, but their prolongation, even as growth and credit were recovering, contributed to strong asset price valuations and a very significant rise in indebtedness, making subsequent adjustments more delicate.

In the euro area, the persistence of inflation deemed too low relative to the 2% target justified this ultra-accommodative stance, even though globalization and digitalization suggested structurally low inflation. At the same time, insufficient reforms in member countries and the sensitivity of public debt to rising interest rates encouraged the ECB to maintain an accommodative policy for longer than the Federal Reserve.

The post-Covid inflation shock, amplified by the war in Ukraine, led to rapid tightening—highly effective in that, without breaking growth, it helped preserve the anchoring of inflation expectations at a low level. Today, as tensions in the Middle East revive uncertainties over energy prices and critical materials and equipment—hence over inflation—the ECB, like the Fed, once again finds itself walking a tightrope: on one side, the risk of slowing growth; on the other, the risk of a resurgence in underlying inflation if prices and wages enter a feedback loop.

The situation is all the more complex within the euro area as inflation rates remain heterogeneous: France’s needs differ from those of Spain or Germany. The ECB therefore favors a cautious, meeting-by-meeting approach, based on a careful reading of incoming data. Since the outbreak of war in the Middle East, it has also exercised significantly heightened vigilance and must anticipate as best it can any potential second-round effects should the conflict persist.

Thus, although inflation is still close to target, upside risks linked to geopolitical tensions—particularly in energy and supply bottlenecks across various sectors—must be closely monitored. At the same time, expected growth in the euro area remains modest, around 1% to 1.5%. International institutions emphasize that without reforms to boost productivity, deepen the single market, and enhance labor mobility, potential growth will remain durably constrained.

In such an environment, a further rate cut would not mechanically generate growth. It would above all risk fueling new imbalances and undermining the ECB’s anti-inflation credibility. The conditions for a higher growth path—and thus for better debt sustainability—primarily depend on structural reforms: labor markets, pensions, innovation, human capital, and further integration of the single market. These are levers that monetary policy can neither decree nor replace.

Olivier Klein
Professor of Monetary Policy at HEC

Categories
Bank Conjoncture Economical and financial crisis

Europe : high time to wake up

Les Échos , the 18th of February 2025

We are at a real turning point in the history of Europe. In this changing world, which has turned its back on multilateralism and today faces the pure and simple return to the balance of power between nations, one of two things will happen: either Europe pulls itself together economically, politically, diplomatically and militarily, or Europe that is half-asleep continues its decline and gradually disappears from history. 

But getting its act together will not be easy. If Europe has clean hands today, it is heading towards having no hands at all. Let us put an end to our inability to be bold and innovative on our aging continent, due to the constant desire to regulate and standardise before inventing, creating and developing. Furthermore, to force the rest of the world to follow our standards is naive; we have neither the economic nor the diplomatic power to impose them on others.

Let us stop thinking of ourselves in Europe as the camp of the self-righteous, by developing for ourselves at every turn finicky regulations where the letter ends up prevailing over the spirit. They end up hindering our companies, with endless bureaucracy. These are worthwhile goals, but the never-ending red tape needlessly damages our competitiveness.

Let us do away with our naivety in wanting to be continuously top of the class on climate, when this leads directly to the detriment of our industries and de facto favours populism which has a strong climate skepticism. Let us instead seek to best combine the health of the planet and growth, by investing massively in the industries of the future – where we have no presence – including in the climate transition industries – where we are so weak.

Let us also leave behind our naivety when it comes to energy, where yesterday we were subjugated to Russia, and tomorrow to the United States. It is essential for our global competitiveness. Currently we are on average paying at least five times more than the Americans for the price of natural gas.

Let us think that the single financial market would be highly desirable, but that it would not produce the expected effect on its own. The surplus of European savings will spontaneously finance more investments in Europe – only if we establish an explicit framework of financial solidarity within the euro zone. For this, the public finances of France, among other countries, must finally be credible. Risk sharing versus market discipline, right? We also need a European capacity to facilitate the development of our newly created companies to make them global giants. And thus provide attractive returns.

The multiple non-financial barriers to doing so are crippling.

Europe no longer knows how to correctly combine the principle of ethics and that of efficiency. Ethics alone, constructed as an absolute end, to the detriment of efficiency, is only a short lived illusion that we create for ourselves. The reverse is also true. But today, multifaceted, quasi-dogmatic formal ethics has ideologically taken too much precedence over its indispensable partner and unduly hinders it. It is the right balance between regulation and free play of the market that we must aim for. One that enables the dynamics of the economy while seeking the necessary protection against its potential excesses.

Europe has been, and can once again become, the place on earth that best combines these two principles. This has made our social market economy model so strong. It is up to pro-European democratic forces to vigorously regain the vitality and balance they need. Before others impose a brutal paradigm shift on us.

 It is only through this renewed vitality that Europe will be able to continue to chart its course and control its destiny. This is an urgent matter.

Categories
Bank Economical policy

What does the future hold for Retail Banking?

My article published in ‘Les Échos’ on November 22, 2024

The profitability of retail banks is in question. Is it inevitably low in France? Some food for thought. Retail banking has two engines. If one of the two does not work, profitability is compromised. Asset-liability management, i.e. interest rate and liquidity risk management, is crucial because income from loans and deposits – the Net Interest Margin – depends on the yield curve and its evolution. Like any good merchant, in this case money, the bank must buy a little cheaper than it sells. However, it borrows customers’ savings mostly on a short-term rate basis and, in France, lends mostly on a medium-long term fixed rate basis. The evolution of the spread between long and short rates is therefore an essential parameter. The bank itself takes the interest rate risk by allowing individuals, as well as small and medium-sized companies, to be not subject to it. The bank must therefore properly measure, anticipate and manage this risk, which has been successful to a varying degree for French banking groups in recent years with the sudden return of inflation and the subsequent rise in rates.

But retail banking must also be efficient with its second engine: its commercial capacity. The digital revolution has been a game changer for some years now. Marketing or the offer is one aspect. But since banking products and services are easily and quickly copied and highly regulated, there is little difference between them. On the other hand, the customer approach, the organisation of the sales force, similarly its management method, the choices of combination between physical presence and “online” banking, are key elements in the greater or lesser success of retail banks.

The digital revolution in banking can lead to a drastic reduction in the number of branches, with the idea that banking will increasingly become online without client advisors. This is a difficult path in France, as banks are much more relational (advice) than purely transactional (simple daily operations: transfers, balance checks, etc.). To make a purely online bank profitable, it is necessary to succeed in sufficiently equippingcustomers with a wider range of products and services. Those who gradually manage to do so therefore need more and more advisors and to move away from a purely “online” model. In a different way, it is possible, while streamlining its network without systematically reducing it, to use digital technology to simultaneously improve customer comfort and free up sales time in the branch for more proactivity, as well as added value provided to customers, by advisors. On the other hand, not significantly changing anything, while ignoring the powerful effects of the technological revolution, cannot serve as a solution. The time of the customer in contact with his bank mainly dueto his visiting a branch is long gone. The operating coefficient (expenses on income) would then inevitably rise to the point of suffocating the bank. With an unavoidable drop in results as a result.

Retail banking responds to the immediacy of time, through its payment services, but also – and this is probably its deepest essence – to the long term, through its advice. It supports customers in their life and business projects, which are all prepared and unfold over time. This advice requires savings, credit and insurance, all products that continueover time and require support, regardless of the type of customer. Digital technology must therefore be used to ensure customer comfort and to maximise advice time and its added value. It is a question of strategy, means and incentive systems.

The future of retail banking therefore requires an appropriate financial and distribution policy, excellent operational control of these two drivers and the ability to give meaning and strong motivation to the human resources on which any service industry ultimately relies. Retail banking therefore has a future.

Olivier Klein
Chief Executive Officer of Lazard Frères Banque
Professor of Economics at HEC

Categories
Bank

The paradoxes of central bank credibility

At the end of October, the ECB maintained the status quo on key interest rates. Christine Lagarde then clarified that a reduction, or even the possibility of it, was “totally premature”.

For any action, credibility is essential. It makes it easier to achieve the desired objective because everyone thinks that the person who acts is trustworthy. In the appropriateness of the desired goal. In the determination to achieve it. Likewise in the judicious choice of the means. This is the case both in business management and in politics and obviously in monetary policy as well. However, there are paradoxes in this subject which in no way contradict the principle stated here, but which make it more complex.

The first lies in the fact that central banks, by showing their credibility in the 90s and the first half of the 2000s, both in obtaining regular economic growth and low inflation (aided by globalisation and the digital revolution), consequently considered that a long period of regular growth and controlled inflation should simultaneously induce financial stability id est : a reasonable increase in asset prices (stocks and real estate), and a stable level of indebtedness of economic players.

However, the financial crisis of 2007-2009 clearly showed that long term interest rates too low for too long- relative to the growth rate – easily led to financial bubbles. Therefore the credibility of central banks must henceforth go beyond this first paradox. It must be exercised simultaneously aiming at these three objectives: balanced growth, controlled inflation and financial stability. Even if it is far from easy to make these three objectives compatible in the short term, in the medium to long term, however, it is much more effective in terms of growth to not neglect any of them.

There is a second paradox that central banks face currently. The more credible they are in their desire to not allow an inflationary regime to take hold, the more easily and quickly inflation expectations, both of households and businesses, converge towards the aim pursued, therefore the more effective the monetary policy is. The ability of central banks to bring inflation back to the desired level is in fact due to the impact on the level of demand of the increase in their key rates – thus impacting long-term rates – but also, through their credibility, in maintaining the anchoring of expectations on the desired inflation target. Otherwise, the drift in expectations leads to an indexation of prices on prices, of wages on prices and of prices on wages.

So where does the paradox come from? This credibility, so necessary and so useful, can however lead the financial markets, anticipating the success of the central banks’ fight against inflation, to push long-term interest rates to lower levels too soon, thwarting the effect of the rate weapon’s fight against inflation. Likewise, as soon as they think that the central banks have completed the upward cycle of their key rates they immediately lower long-term rates. However, historically monetary policies slackened prematurely have often led to significant and very damaging subsequent rebounds in inflation. Hence what we are currently seeing in the announcements from the central banks: affirming that they are not about to lower their rates, or even that they can still increase them if necessary. Central banks are thus showing their determination to not weaken their position prematurely for the objective reasons mentioned above, equally through the necessity of a tactical game with the markets. They must in fact not let them believe that the battle is won in advance, despite their credibility . In fact, in the short term, and as long as underlying inflation remains too high, only a severe economic-financial crisis could lead central banks to modify their announcements and their policy.

These paradoxes show, among other things, that monetary policy is as much a science as it is an art.

Categories
Bank Finance Teaching

Olivier Klein, the art of transition

Managing Director of Lazard and CEO of Lazard French Bank after having personified BRED for more than ten years, Olivier Klein continues his teaching and his work as an author. A few months ago, he published “Crises and Changes: Small Banking Lessons”. A read which is easy to follow and to be relished.

Olivier Klein, recently appointed CEO of the Lazard Frères Bank, teaches financial macroeconomics and monetary policy at HEC, writes numerous articles on banking strategy, monetary policy, monetary economics and structural reforms, and participates in numerous conferences where he loves to rub shoulders with the greatest economists and leaders of financial institutions. Finally, a few months ago he published a major essay with Eyrolles and RB Édition, “Crises and Changes: Small Banking Lessons”.This book is a must read! Olivier Klein has a way with words and a penchant for well-chosen quotes. Above all, this professor-banker, based on his very well-documented field experience, offers analyses that shine a new light on strategic thinking. For example, how do you change things without breaking them? Followers of the “stakeholder” approach as well as those who support the notion of respecting the identity of companies will find convincing arguments here.

Beyond the abundant ideas that give structure to this book, it is the author’s ability to take action, to express an idea, and to teach that holds our attention. Olivier Klein is, without doubt, a “ferryman” and these days our society is missing this type of profile. We have excellent researchers, who publish in the best scientific journals, we have very high-level business leaders, but the problem of the “transfer” between theory and practice like that between research and pedagogy remains subtle and complex.

Olivier Klein’s career, like his works, is, in many respects, an example of a successful “transfer” and can enlighten us on the importance of this idea.

First, because his career and his approach in his macroeconomics articles show us how practice is enriched by scientific processes and models produced by research. When reading his book, we see clearly that there is no action that is not carried out without reference to clear knowledge. Chris Argyris, a Harvard professor and one of the theorists of organisational learning, spoke of “a theory of use”. Thus, practice, if it cannot resolve to “fit” into a single paradigm, necessarily relies on models, on theories.

From science to practice

We still need to be able to transfer these models into practice at least cost. “At least cost” here means “minimising the risk of misinterpretation of the available scientific results”. This is where Olivier Klein succeeds brilliantly as well. This is no easy task, if only because a single scientific discourse cannot simultaneously resolve all the problems put before the practitioner. This difficulty often results in frustration which leads some to throw the baby out with the bath water, that is to say, to reject all the contributions of theory and science, under the pretext that they cannot solve all the problems at hand. This is where the “ferryman”’s contribution lies. He must help with the transition between science and practice. He must choose the most effective
aspects of the theory, propose a rigorous interpretation of the facts and finally, participate in the nuances of the categories of thought. He must, in some way, offer what we will call a “lesson.” That is to say, his approach must be analogous to that of “good essays”. We know that “good essays” are those which, rigorously, choose certain parts of theories to challenge them without complacency with a particular situation, located in time and space. The “good essay” must also propose to rigorously erase certain boundaries between the different sciences. If these are in fact structured in terms of paradigms, the “ferryman” must be able to propose a “negotiated” synthesis, that is to say created through diverse influences, combining multiple scales of analysis and that is prescription-oriented.It is therefore not a popularisation of science because the “ferryman” must demonstrate great intellectual vigilance when articulating in a global vision several theoretical referents, several insights and several habits of interpretation specific to each practice.This is what Olivier Klein also achieves, especially in his book, and this demonstrates great discipline of thought. The Capitol is in fact close to the Tarpeian Rock: the difficult task of “translation” risks being transformed into a hasty collection of the latest fashions and cursive interpretations of poorly assimilated theories. The “ferryman” can, if he is not careful, become a “soup seller”. This is what Olivier Klein avoids, page after page, demonstration after demonstration.

To conclude on Olivier Klein’s role as a “ferryman”, I believe it is important to emphasise that his works certainly enlighten us, but above all, and this is a major point, that they encourage us to face the future. In our time we are afraid of modernity which excludes, which replaces man, which explores the boundaries, which builds a threatening order against, apparently, “the good old days”. There is a significant temptation to be reactionary and to condemn. In Olivier Klein’s ideas, he invites us to live in the future, optimism (or pessimism) is never the fundamental question. We must “simply” understand our world, and then commit ourselves to exercising our freedom to invent the new tools that are needed! Olivier Klein is undoubtedly a “ferryman” who mobilises.

References

  • Argyris Ch., with contributions from Moingeon B. & Ramanantsoa B. (1995), Knowledge for action. Overcoming Obstacles to Organizational Learning, trans. by Loudière G.), lnterEditions.

  • Boutinet J.-P. (ed.) (1985), From discourse to action. The social sciences question themselves, Social Logics, L’Harmattan.

  • Geertz C. (1986), Local Knowledge, Global Knowledge. Places knowledge, Phew.
  • Cain T., Wieser C. & Livingston K. (2016), “Mobilizing Research Knowledge for Teaching and Teacher Education”, European Journal of Teacher Education, flight. 39, no. 5, p. 529-533.
  • Gaussel M. & Rey O. (2016), “The Conditions for the Successful Use of Research Results by Teachers: Reflections on some Innovations in France”, European Journal of Teacher Education, vol. 39, no. 5, p. 577-587.

  • Gaussel M., Gibert A-F., Joubaire Cl., & Rey O. (2017), “What definitions of the passer in education? “, French review of pedagogy, 201-2017, 35-39.

  • Munerol L., Cambon L. & Alla F. (2013), “Knowledge brokering, definition and implementation: a review of the literature”, Public Health, vol. 25, no. 5, pp. 587-597.
  • Ward V. L., House A. O. & Hamer S. (2009), “Knowledge Brokering: Exploring the Process of Transferring Knowledge into Action”, BMC Health Services Research, vol. 9.
Categories
Bank Finance

A Banker’s Life

The Economics Professor who transformed BRED, which he ran for over ten years.

He arrives slightly out of breath, apologising for being late, with a big smile. Elegant in his dark suit and sky blue silk tie, Olivier Klein the Managing Director of BRED invites me into his contemporary office high above the Seine populated with his collection of African statues. But the real passion of this fan of primitive art is banks, and in particular his own that he has managed skilfully for over ten years and successfully since the net banking income has increased by 70% in a decade. This boss is also a professor at HEC and the author of numerous publications. A busy life, “an achievement,” he says, of which he is proud. He can thus spend hours discussing world markets adding humorous remarks, using pedagogy to decipher a complex world, inaccessible to laymen.

However, at 65 after an exemplary history of leading large establishments he was obliged to leave BRED at the end of May. When he brings up his imminent departure on this day in April, the eyes of this man with his joyful personality become misty. “It’s not easy to say goodbye,” he frankly admits. Having reached his age limit he regretfully left his position. A brief moment of abandonment quickly forgotten when he begins to recount his banking saga, which started at the beginning of the 1980s.

Expert in Acquisitions and Mergers

Economics and nothing but economics. When Olivier Klein graduated from the National School of Statistics and Administration (ENSAE), finished his postgraduate studies at HEC, and received his diploma from Panthéon Paris- Sorbonne, he hesitated. Should he become a distinguished economist, diving deeply into study and forecasts? Tempting, but this young man finally prefers banking which is at the “crossroads of the economy”. He recalls “I needed to act, to make concrete things happen.” And so in 1985 he joins the French Bank of Foreign Trade (BFCE) and becomes head of the risk management consulting department in charge of change and interest rate risk and puts together complex offers for large groups. He then sets up the business banking at BFCE where he takes the helm. He finds this work very satisfying. But it’s not enough for him to be fulfilled. So to continue moving towards macroeconomics and to satisfy his great curiosity he becomes an affiliate professor at HEC: “I don’t play golf, I have no hobbies, but I need to reflect and to transmit; this helps me become a better banker,” he pleads, affirming that he was able to predict the 2008 financial crisis thanks to his constant watchfulness, an overall understanding of the system and an ever critical eye. “Constantly on the lookout for any signs of weakness in the markets, he’s a visionary; he knows how to anticipate and develop his strategy,” points out Françoise Epifanie head of development at BRED. A double life which makes him a rare breed in the world of banking, “He’s on the one hand an intellectual, an economics professor and on the other he’s very hands-on : a very rare balance!” confides Eric Lombard, Managing Director of Caisse des Dépôts. Determined, a hard worker -“he has an extraordinary capacity to work,” according to an executive manager- he has never given up on his teaching. Even when he joined Caisse D’Epargne in 1998 where he was initially appointed as president of the board of directors for the western Paris region before being sent to Lyon. For this fourth generation Parisian it’s his first job in France outside of the capital. But this food lover and fan of good wines loves the area. And he,“then values the crucial role of the regions in the equilibrium of France,” he affirms. Olivier Klein realises that it is the dedicated involvement of the directors of the established regional banks that are behind the success of a decentralised retail banking group. An expert in acquisitions and mergers, he is given the task of fusing Caisse D’Epargne from the Alps region with the Rhone-Alps Lyon Caisse D’Epargne. A prelude to future mergers, such as the merger between Banques Populaires and Caisse D’Epargne in 2008 (later to become BPCE) in which he was actively involved.

Managing Director of commercial banking and insurance at the head of the newly formed group, Olivier Klein quickly covets BRED bank- which he made into, “a little jewel” points out admiringly his old teacher and former Minister of Economy, Edmond Alphandéry. Taking advantage of the retirement of his predecessor, he takes over in 2012. It’s an entrepreneurial bank,”the most complete in the group” he rejoices. He develops the bank with steady progress going against the tide of the rest of the banking sector rushing to bring in the digital to replace the bricks and mortar banking. He, on the other hand, keeps the branches open, opens more and increases employee recruitment. Convinced of his strategy he launches the, “bank without distance” in opposition to the pure players focused on remote banking, increasing the training budget by 40% so that his employees can best accompany their customers in their life projects. “He understood that the success of a company rests on the quality of its teams,” points out someone close to him. He wants to make BRED 100% dedicated to giving advice, much to the dismay of his team, which finds him a little audacious and in a rush.

Perfectionist

And yet the Covid-19 crisis proved him to be right and speeds up the transformation. Being ambitious he also decides to conquer new markets and quickly moves into Cambodia and the Fidji Islands: “He set up shop in places which bankers generally avoid, and he was right to do so,” notes Edmond Alphandéry. Without any false modesty, Olivier Klein is delighted with his results which he sends to all those that are close to him. His fondness for grand strategy doesn’t prevent him from following closely the day- to-day business. He frequently travels around visiting regional branches and banks outside of France and always begins each visit with exchanges with the local teams. A man of communication- and speeches- he enjoys these trips during which he reassures and rallies his employees. On the other hand he will not accept anything that is slapdash. “He doesn’t let anything go by, he’s always on the frontline no matter what the activity,” acknowledges Françoise Epifanie and jokes, “He always encourages people to go beyond themselves”. And he knows how to delegate when he believes in the person, this indulgent boss keeps an eye on everything at all times. Even when he is on holiday he has difficulty in letting go.

As his departure approaches this sixty-something feels he is in great shape. As much as he loves his collection of African statues as wells those from Papua New Guinea which sit in state in a dedicated room, Olivier Klein is ready to head towards new horizons.

L’Hémicycle – Corinne Scemama
Article published on 19 June 2023.

Key Dates

  • 15 June 1957: Birth in Paris.
  • 1985: Head of the risk management consulting department in charge of change and interest rate risk for key accounts at the French Bank of Foreign Trade (BFCE). He then sets up Business banking at the heart of the group.
  • 1985: Affiliate Professor at HEC.
  • 1998: President of the board of directors at Caisse D’Epargne for the western Paris region, followed by the Rhône-Alpes Lyon Caisse D’Epargne.
  • 2010: Managing Director of the BPCE Group, in charge of commercial banking and insurance.
  • 2012: Managing director of BRED.