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Can we trust cryptocurrencies ? 18th “Recontres Économiques d’Aix-en-Provence”

Bitcoin and other cryptocurrencies are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost. This currency would pass through intermediaries, and its value could not be manipulated by governments or central banks. It would be subject to private, decentralised management. It would guarantee the anonymity of transactions, and its guardian would not be a central bank but an algorithm, a supposedly infallible IT programme. And, at a push, it would be possible for everyone to launch their own project to create a private currency, outside of controls and regulation.

It is a libertarian utopia that abrogates the role of the state, institutions, banks… what a dream!

I will try to demonstrate that it is precisely a utopia and that it cannot work in this way.

This analysis is based on monetary theory.

We must first ask ourselves if these cryptocurrencies are appropriately named and if they are really currencies. Going back in history, we find the hypotheses of Friedrich Hayek and the Austrian School, who, in 1976, called for the denationalisation of money, “to take from government the monopoly of issuing money and hand it over to private industry”. In some ways, the development of cryptocurrencies could be fulfilling this wish.

However, bitcoin is not a currency in the classic sense of the term. It is not a unit of account, or a medium accepted everywhere (in fact by very few merchants) to exchange value, and is extremely volatile. But nevertheless, it is a form of private money, without a central bank, as it is exchanged between the members of the “clubs” that hold it. It is created by a private issuer who benefits from it. Because, remember, when someone creates a private currency in the form of a cryptocurrency, as the issuer, they receive a very small percentage of the amounts issued.

We must also question the nature of the counterparty of the currency created. Another look at the history books shows us why cryptocurrencies are intrinsically unstable and why they are not currencies. In the 19th and then at the end of the 20th century, two schools of thought came into conflict, that of the Currency school and that of the Banking school. The Currency school considers that quantities of currency must be based on holdings of precious metals, either gold or silver. These are private currencies, issued by banks. They circulate and are regulated freely by supply and demand, without state or centralised intervention. The convertibility of currencies into gold or silver in fact penalises the banks if they issue too much, and, reciprocally, their results are weighed down if they do not issue enough.

For its part, the Banking school considers that the best counterparty for the currency is not gold or silver, but economic development. Money is created from credit. Today, loans make deposits. In other words, it is still the banks that create money, but they do so depending on demand for credit, thus mainly the needs of the economy. And this system must be regulated by an institutional authority, since it is not self-regulated by the convertibility of each currency into gold or silver. Regulation is therefore the task of an external organisation, the central bank, which has a number of instruments to influence, as much as it can, the quantity of credit distributed by the banks.

In both cases, there is a point of reference, whether it is the needs of the economy and central bank policy, or precious metals. In addition, the Banking school implies that there is a unification of the value of each private bank currency by the necessary conversion to prices fixed in the currency issued by the central bank. The currency area is thus homogenised and the quantity of currency issued regulated by central bank policy.

The debate between these two way of thinking is in practice outdated, because central banks were not created on the bizarre whim of a bureaucrat who wanted to create administrations to control currencies and individuals, but quite simply as a response to a series of extremely serious financial crises that occurred at the end of the 19th and the beginning of the 20th centuries, owing to repeat bankruptcies of banks, while they were issuing currencies convertible against gold and silver. Without a central bank to homogenise a currency area, these currencies could carry different values depending on the degree of confidence accorded to each issuing bank. Until confidence completely disappeared, as did the bank itself, though a series of cumulative processes. . By homogenising the currency area and playing the role of lender of last resort, the central bank has thus created the possibility of stability, thereby preventing the recurrence of financial crises or considerably dampening the effects of such crises on the real economy.

Moving on to our argument, all this explains why cryptocurrencies are not really currencies. They have no basis. They do not have as a counterparty gold or silver, or the needs of the economy, since they are issued by private individuals depending on rules set arbitrarily by these individuals and without any objective reference outside the cryptocurrency system itself.

In addition, newly-created “currencies” have proliferated (more than 1,600 cryptocurrencies!), which we can clearly see is unrealistic, because it is not in any way linked to the development of the real economy. To be a currency, economic players must have confidence in the currency issued and accept it as a discharge payment method, i.e. as a means of definitively releasing the debtor from his debt to a creditor or supplier. We can see that if everyone can create a currency from scratch, without counterparty or external regulation, none of these “currencies” can win the necessary confidence from everyone to acquire the real status of currency. In addition, if everyone could issue its own currency, no monetary constraint would therefore be possible and the system could not work.

I would not therefore say that it was a currency, but at best a financial asset. And, for all the reasons set out above, a cryptocurrency’s value is extremely unstable. A fall in confidence is enough to trigger a drastic slide in the value of this type of currency, or conversely, when its value rises, more and more people buy it, pushing up its price without a visible limit and “in a vacuum”. We are then faced with wild speculation, speculative bubbles that can balloon and burst at any time.

In conclusion, it is therefore at best a financial asset, but an asset that has no basis. We therefore bet on the value of this currency, through supply and demand alone, with no other reference point than the confidence that we have in future supply and demand, and without any objective reference point relating to the value of a company or economic development. In this case, we are in a purely self-referential situation. It is therefore in essence a hyper-speculative asset, as is created from time to time in the financial world, completely detached from the real economy.

Institutions exist precisely because they respond to a need for regulation to avoid this type of chaos and crisis. It is undoubtedly not the time to try and destroy them.

In conclusion, I would like to recall the words of a columnist from the Financial Times, who said that the way economists have paid no attention to cryptocurrencies is only equalled by the way in which cryptocurrency enthusiasts do not care about the economy. Finally, as Jean Tirole highlights, while blockchain is useful, cryptocurrencies do not contribute to the common good.

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Bank

High street banks’ advantages to counter the threat of uberisation

High street bank’s advantages to counter the threat of uberisation

Olivier Klein

The word “uberisation”, taken in a broad sense, can be used to refer to the threat to an established model posed by a succession of innovations and the involvement of new parties. The question that arises today is whether the banking sector is experiencing uberisation and if so, what advantages do banks have to fight it? It is possible to establish arguments in response to these questions with a fair degree of certainty.

Retail banking is seemingly more affected by the phenomenon of uberisation than business banking. Digital innovations, which can find a use in banking, take various forms, including robotisation, digitisation of processes, agreements and signatures, big data, artificial intelligence, payments and many others. Such innovations are evidently highly disruptive and create many revolutionary possibilities, which should be analysed and incorporated into bank strategies.

Two types of disruption in the wake of this technological revolution are particularly worth studying, firstly the possible shift to virtually unique online banking model known as “neo-banking”, and secondly the appearance of new players, in particular start-ups such as fintech firms, competing with commercial banks in profitable segments within their value chain.

Both these issues are important and different, even if the responses that they generate might sometimes overlap.

Is it possible to imagine banking without branches ?

Some analysts describe banking as “tomorrow’s Kodak” or, less radically, as the “next steel industry”. The subject deserves responses that are built on a sound analysis. First of all, the issue of digital technology must be distinguished from that of interest rates. We are at the point where the two phenomena meet, but they have nothing to do with each other. On one side is a very flat interest rate curve which harms retail banks’ profitability. There is a reasonable expectation that rates will rise again, in particular to produce a sufficient gap between short-term and long-term rates, and the central bank will gradually emerge from quantitative easing, since it has already begun to recalibrate its actions in this area.

On the other side is digital technology and its effect on profitability. It would be a mistake to use digital technology to respond to interest rate issues in the belief that low interest rates are changing the model structurally. Interest rates at time ‘t’ do not change the model in itself, but do temporarily harm profitability, which is different.

Retail banking : day-to-day banking and banking for customers’future plans

The following arguments are a return to fundamental questions, namely what is the very essence of retail banking and what is the essence of the banking relationship? A clear distinction needs to be made here between invariants and contextual aspects that change according to the technology currently used and its adoption by customers. In retail banking, the model which may differ from one country to another depending on the custom and practice specific to each, there are two main areas, i.e. transaction banking or the “day-to-day” component, and relationship banking concerning customers’ plans for the future and financial advice. They are two separate types of banking demand, although they naturally often overlap.

Day-to-day banking is that of commonplace transactions – collecting a chequebook, making a payment, withdrawing or depositing cash, and so on. The development of the internet, smartphones and ATMs means that a transaction bank has almost no need for a branch network to perform these commonplace transactions. Branch footfall has decreased significantly, and there is therefore a constant decline in demand for counter services.
Relationship banking, meanwhile, relates to customers’ future plans and providing advice, offering support during difficult times that can happen to anyone sooner or later. It characterises the deepest relationship between consumers and their bank, well beyond just managing means of payment. Such a bank retains its customers for a long time. This lengthy period is tied to the fact the bank looks after customers’ future plans, from preparation to completion. Such plans can be highly significant, such as paying for studies, setting up a business, buying a house, pension planning, and so on, or be on a smaller scale and arise more frequently, such as planning a trip or buying a car. A lasting and strong relationship of trust is forged between the customer and the banker. The range of needs met by relationship banking can therefore be described as long-term, likewise the products offered, i.e. credit, savings and insurance, all of which are long-term products.

Opposing schools of thought are routine within a society. In the late 1990s and the 2000s, many questions were raised about whether supermarket chains were going to replace banks. At the time, numerous articles appeared opining wisely that supermarkets were going to swipe whole swathes of bank revenue. However, this did not happen, for the simple reason that supermarkets run a short-term business, where the products sold are consumed almost immediately. If a product fails to satisfy a customer, it is easy to change the brand, or indeed the supermarket chain used, which is not the case in banking as taking out a loan, savings account or insurance policy is, as a general rule, a longer term commitment. Bank advisors consequently need to stay in their jobs for a sufficient length of time, which customers very much prefer to see. In supermarkets, in the main, sales staff have vanished from the stores. At the time, it was consequently difficult to believe that supermarkets could take significant market share from the banks, precisely because a fundamental analysis of the very essence of the banking relationship showed that savings products were not bought shrink wrapped. The only overlap between supermarkets and banks occurred in the area of consumer credit, payment cards and loyalty schemes, all of which are an extension of the purchasing act. Until now, this has been the only area where there really has been genuine competition between supermarkets and banks.

Furthermore, different countries feature different mixes between relationship and day-to-day banking models. Research conducted on behalf of the French Banking Federation in 2010 attempted to find out which countries had banks with a strong relationship component. France was one such country, which did not mean French banks were not transaction banks, but simply that they had assigned relatively greater importance to the relationship aspect compared to many other countries. Countries that have models that are much more transaction-based than relationship-based therefore see a benefit in closing numerous branches, as their branches do not have enough products to offer. For relationship banking, the issues are different and the prospects more promising.

Fewer counter transactions presents an opportunity for banks

People are therefore travelling less and less often to banks for their day-to-day banking needs. But does this mean customers have less appetite for relationship banking services? Over the last ten years, relationship channels with bank networks have changed, to now include physical visits, telephone banking, email, video, online chat and others. However, they have not eliminated the need for bank advisors. But while there is still the same, if not more, need for advice, customers need to know where their advisors are.

ustomers want to physically see their advisors at regular intervals, either to deal with specific important matters or just for reassurance. Having local branches is therefore not entirely inappropriate, especially as they are also, as a location physically representing the bank, a means of reassuring a large number of both retail and business customers. So as these local branches already exist, why not take full advantage them? Furthermore, they have an advertising presence on the high street that is the envy of online banks.

In this way, relationship channels are changing and dovetailing but not being lost. Ultimately, they are really essentially based on the relationship with the customer advisor. The core element does not change, because there is no drop in demand for banking in relation to customers’ future plans, quite the opposite. With the internet, customers are increasingly demanding as regards the quality of advice received, as they know exactly how to use it to find information, compare and switch if need be. They require advisors to be even better, more responsive and more proactive than in the past.

In reality, the decline in counter transactions is actually an opportunity for banks, which is not the paradox it might seem. Firstly, digital technology has eliminated the repetitive counter tasks that earn banks nothing and costs are saved as a result. Much more sales time can also be allocated to customers who are asking for more, while converting people who were previously counter staff to banking advisors. Most of the time, such people are easy to train up, being younger staff and keen to advance. Thanks to digital technology, there is more time to sell banking products, and commercial staff can be spared repetitive tasks.

Secondly, as a consequence of the first point, advisors’ productive commercial time can be expanded, leading to increased productivity. Banks’ gross income is consequently increased through their greater capacity to advise and serve customers and thus meet their requirements.

Thirdly, digital greatly enhances the customer experience because some transactions are easier to conduct remotely or using ATMs. Customer satisfaction is therefore improved by greater bank usability.

Lastly, digital technology is also an opportunity as it enables the relationship model itself to be improved. Big data and artificial intelligence, as they are gradually incorporated, deliver better understanding of customers and their needs. This is a matter of intelligent sales productivity, and customers are much more satisfied as they are only contacted about subjects that relate to their actual requirements.

Take the high road : invest massively in improving skills and in digitalisation

Improving banks usability and the quality of advice are therefore both key to success. Two routes enable high street (i.e. branch-based) banks to achieve this, namely training and digital technology itself.

If high street banks deliver the same usability as online banks but without such low bank charges, then they need to differentiate themselves in some other way, i.e. high-quality advice. Although they are entirely legitimate operations, purely digital banks do not have any advisors.

In actual fact, customers in France are demanding both, i.e. a highly practical day-to-day bank, and a regular advisor who can offer them some added value. They therefore only try to split transaction banking from relationship banking, or even make do with a single, day-to-day, low-cost bank, when their usual bank does not excel in both areas.

High street banks therefore hold a definite comparative advantage, albeit subject to two conditions. Firstly, they must continue to invest to be as effective as online banks in terms of usability in day-to-day banking, which is totally feasible. Secondly, they must ensure they have the capability to deliver high-quality advice, worth paying for because of its added value. Significant investment in digital technology and training therefore constitute two key success factors to counter the threat of uberisation.

However, flexible organisation of both the network as a whole and each branch, together with optimum use of resources to allocate them to the greatest revenue generators, is also crucial. In some cases, banks may close branches because the need for day-to-day transaction counters is disappearing. It is consequently no longer vital to have a branch every 200 metres in city centres, although they are still essential for providing advice. Depending on current bank locations, the number of branches to be cut might vary considerably.

In addition, online banking is not profitable at this point, or only very slightly, precisely because it experiences great difficulties in supplying customers Furthermore, it has to incur considerable costs to acquire new customers, as it needs to advertise much more heavily than other banks to do so. Having no high street presence, online banks must attract customers before they simply wander into a high street branch. In a similar vein, online banks need to offer plenty of gifts and free offers. For example, €80 is the typical bonus paid on opening an account. Many students open accounts with more than one bank in turn in order to obtain these payments. Customer loyalty is therefore not straightforward. As a result, low-cost online banks must essentially focus on transaction banking. Generating profit from such business models and leveraging customers accordingly becomes fairly difficult, unless the range is expanded and advisors recruited, which is in fact starting to happen. Low-cost services, almost by definition, cannot ensure contact is always with a regular advisor. They therefore must make customers pay each time they use an advisor. In addition, when the low-cost banking service is provided by an existing high street bank, when customers need to deal with a personal issue or obtain advice in preparing or completing some long-term plan, they are forced to switch product category and stop using the low-cost service. Such a development, still rare, is very inspiring, as it could herald a situation where some traditional banks go partly digital while online banks up their game by hiring banking advisors. These two levels of banking would then move closer together in an interesting way.

Dispensing with people in delivering advice

The question then arises: can banking advice itself go digital? The following thought process seems simple enough: with properly organised big data and well-designed artificial intelligence, automated “pushes” (by text message or email) to customers would make human advisors pointless. Customers could receive intelligent suggestions, sometimes perhaps even more intelligent than those made by an inadequately trained or poorly supported advisor. Why therefore would we need banking advisors in future, when everything has been made digital? Although it is impossible to see 10 or 20 years ahead with any certainty, it is difficult to envisage eliminating people from the provision of banking advice.
Machines are admittedly able to beat human endeavour in many fields, but man and machine combined will beat a machine alone. Some humility is nonetheless called for, as who knows at this point what artificial intelligence will be able to achieve in future?

rtificial intelligence experts themselves adopt a cautious stance. There are however a number of factors to take into account.
The first is that trust is a key component of the banking relationship, for one simple reason, namely that customers entrust their money to banks and need their support in achieving their future plans, which makes banks very close to customers and vital to their security. Personal interaction currently generates infinitely more trust than dealing with a robot, no matter how “intelligent”. Younger people, completely at ease with digital technology, are for example asking banks to provide a regular advisor, even if they do travel to branches much less. BRED conducted an experiment whereby banking suggestions were sent by text message or email to groups of customers in identical situations. As ever when email shots are dispatched, a positive response rate of 2-3% was received. Secondly, the shot was sent to other people, in the same situations, but this time with a follow-up phone call from a banking advisor on the same subject. Response and conversion rates were ten times higher. This small, but genuine, experiment, gives grounds for real hope that people will remain a core component of the banking relationship.

The second issue relates to the fact that a bank’s reputation is also part of the basis for trust, which is an added value and an asset for banks.

In addition, cognitive science is now showing that decision-making involves not only rational intelligence, but also emotional intelligence. Research presents cases of individuals who have sustained injuries and lost the use of that part of the brain used for emotional intelligence. Such individuals then become totally incapable of making decisions, while their reasoning and analysis capabilities remain fully intact. Advances in cognitive science accordingly show that taking the right decision entails intuition about the solution combined with a proper analysis. Interpersonal relationships can therefore be a potent factor in decision making. In a similar vein, econometric research has found that learning is more effective when carried out face-to-face with a teacher than it is with a MOOC (Massive Open Online Course). Although the extraordinary benefit of MOOC in the dissemination of knowledge and its ability to reach many more learners is unquestioned, teachers (or trainers) present in a classroom still have a future.

Lastly, the population is receiving more emails and text messages each and every day, “pushed” out by unknown persons and organisations. If it has not already been reached, saturation point will soon occur. The difference will then take the form of human beings who can bring some added value to these “pushes”.

For all these reasons, high street banks are probably not threatened by extinction from anything approaching possible uberisation.

Can the technological revolution enable some players to compete with commercial banks ?

The second approach concerning uberisation consists of asking whether banks might suffer a loss of profitable market segments as a result of the arrival of outsiders, such as fintech outfits currently enjoying a boom.

In fact, fintech firms are increasingly developing services relating to certification and authentication, biometrics, budget management, secure digital archives, aggregators, payments, blockchain, etc. The question is therefore whether banks are running the risk of disintermediation affecting the profitable areas of their value chain.
The model that could legitimately cause concern is that of external aggregators, which can now potentially access data, offer fund transfer services, and therefore initiate payments. These aggregators have the capability to offer budget management services, for example. It then naturally follows to wonder what would prevent them in future from analysing customer data so as to able to offer improved banking products and services. Such players could in particular offer consumer credit using brokers and by offering the lowest bidder – but not necessarily the most appropriate – which might not be the customer’s usual bank. This hypothesis of part-disintermediation of banking is entirely conceivable, but the related hazards may be mitigated by a number of other factors.

In the first instance, many fintech outfits will not have access to customer data, those offering budget management software, for example. It is only with some difficulty that they will manage to take market share from certain segments currently dominated by banks.  Two solutions are available to such fintech firms, either cooperation with specific banks through the latter buying the former or through partnerships, or the building of collaborative platforms with a number of other banks so as to offer services that can be shared. By taking action of this kind, fintechs are moving into and joining the banks’ value chain, but without however disrupting their model. They are even contributing to enhancing that model by forcing banks to broaden their services to become even more effective in their overall model with their customers. By way of example, BPCE Group actively sought out fintech firms to offer business customers CRM solutions linked to payments. Consequently, banks either have the necessary IT investment capacity and can enhance their services themselves, or they look to subcontract this work.  In reality, the solution is often based on a mixture of these alternative approaches. The change will be that hitherto the bank was used to doing everything itself, whereas in future it will probably also be an assembler of components, and no longer entirely self-contained. There is nothing wrong with assembling components if it enables banks to broaden their overall relationship base, and their revenue.

The second case, which might obviously cause problems, is where the fintech firms do have access to some customer data. Web scratching – which could well soon be made illegal or at least strictly regulated – and PSD2 and API more generally give rise to the question of opening up access to bank and customer account data. All banks have now built their own aggregators so that their customers do not have to leave the bank’s environment to get access to their accounts held with their other banks. In the near future, regulations will require access to data to be governed by strict consent rules, making it much more difficult for parties external to the customer’s bank to process data, whether or not those parties are themselves banks.

Discussion is focused on establishing which data it will be possible to access. Customers and the general public are nowadays increasingly aware of the dangers of permitting uncontrolled use of their data. This trend is likely to accelerate, and can be seen particularly in young people. This greater awareness is an obstacle to such intrusions.

Furthermore, the General Data Protection Regulation (GDPR), in force since May 2018, reiterates that data belongs to customers, and customers must approve any use made of it. This regulation applies not only to banks, but to any and all users of data, so it also restricts third-party newcomers from using data in a cavalier fashion. The bank must remain the trusted third party that processes people’s private data, and obviously must not allow that data to be disclosed without customers’ express consent.

High street bank survival relies on their taking the high road based on an agressive strategy

Banks’ ability to survive and in fact improve their overall relationship model with consumer customers by offering and new, built-in services, will therefore be crucial in withstanding uberisation.

While banks are investing heavily in training and digital technology, and at the same time are bringing about essential changes to their organisations, there is no reason to think that the branch-based retail banking model will vanish. On the other hand, as in any model that endures, it can no longer remain undiluted but instead it must blend very closely with the digital model. These days, in all fields of distribution, pure digital models are struggling to survive and purely physical distribution models are dying. The future will therefore consist of the right mix between traditional and digital models, and the route to the right response will be found by understanding what forms the very essence of the banking relationship.

In banking as elsewhere, the risk of uberisation will have stimulated competition a great deal, which is vital in a highly-regulated sector not usually conducive to rapid change. Besides this stimulating effect which will have resulted in improvements to the banking model to customers’ benefit, uberisation also threatens to drive down profitability owing to newcomers exerting pressure. To respond to this threat and increase revenue, other areas could be developed in parallel to the recurring business of commercial banking.

The risk of uberisation needs to be assessed in depth against the yardstick of the advantages of commercial banks. Taking the high road in this way does appear possible, then, provided the necessary changes to be applied are properly assessed, and an intentionally aggressive strategy is adopted.

You can find the original Conclusion here.

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Bank

The future of retail banking.

My first thought is that it is a rare day when, on opening the newspapers, we do not see articles about banks, predicting that we are the new steel industry. I even recently read we are destined to turn into Kodak, which as everyone knows failed to see the technological revolution, fatally as it turned out. So working in banking is very encouraging at the moment. Many employees in our banks are accordingly in a state of uncertainty, and some are just plain seriously worried about the future of jobs in banking.
I am going to try to deal with the topic by revisiting what the President said to introduce the subject. Bill Gates in fact said that “banking is necessary but banks are not”, which is entirely in keeping with the Kodak episode.

I would nonetheless like to remind everyone that he said it in 1994. I feel bound to point out that banks are still here. We will try to demonstrate, rather than just believe, that retail banks will still be here for many years.

Obviously, though, the question arises, and rightly so, because digitisation and globalisation are, in my view, two fundamental revolutions we are experiencing. These are really the two major factors changing the lives of companies and banks in particular. Digital is a technological revolution, but also as a consequence, a revolution in customer behaviour, including in their dealings with banks. Accordingly, the number of customers in our branches is seen to be decreasing considerably and continuously, which leads some to think that as people no longer come to branches, we no longer need branches and no longer need customer advisors. Therefore, the only option, the best option, is said to be a defensive stance. Cut our cloth as much as possible.

I think there are fundamental questions that need to be addressed, which cannot be swept under the carpet, but at the same time, I think that banks, and here we are talking more about retail banks, have some valuable trump cards they can play. The point is, however, not to stick with the usual way of doing things, changing nothing. That would be fatal. On the other hand, however, I think retail banks have the potential to “take the high road” out of the situation, a road I am going to try to highlight.

To do this, we need to think a little more deeply and return to the very essence of the banking relationship and of the banking profession, in retail banking.

In actual fact, there are two areas where the bank operates, not juxtaposed but coordinated with each other, while also being different from each other. Historically in banking, there are banks I would call transaction banks, i.e. a bank for everyday banking, making payments, withdrawals and deposits. The structure of this bank means it can very comfortably digitise completely. With ATMs and smartphones, which can increasingly be used for such transactions, humans can quite simply be dispensed with.

As a result, a number of banks may appear, neo-banks, online banks, almost all of them low-cost banks, dedicated to this transaction handling role, in a cheaper and sometimes more convenient way than traditional banks. Although traditional banks have invested sufficiently lately to catch up. The reason is these new banks are starting from scratch and setting up as online, low-cost banks with very few employees. They often build a new computer system and this is infinitely easier than overhauling all your IT when it has been built layer on layer for years, as it has in all companies and especially in all banks. Consequently, customers find services more practical to use, and the cost this kind of bank can charge is inherently lower. You have to look closely though, because most of the time, when low-cost banks advertise that they are free of charge, it’s just advertising flannel.

But can these newcomers, based on new technology, cause us to disappear?

The first response from our banks is that we have considerable investment capacity and we have very valuable staff and so on. We obviously have to fight against the effects of unwieldy information systems, but nevertheless we can, by investing heavily in digital, definitely manage to digitise processes, to make customers’ relationships with their bank infinitely more practical, to ensure that we are among the best. We can at least be just as practical as the newcomers.

Is that enough? I believe that some major banks consider this to be their main line of defence, reducing costs by cutting the number of branches and customer advisers. So, heavy investment in IT is needed, absolutely necessary to develop digital, to develop “self-care”, and ultimately reduce costs as much as possible to try to move towards an intermediate model between traditional high street banking and online banking.

It is my modest belief that this strategy must obviously be considered, but it includes a high proportion of risk. It is a strategy that could lead to regular attrition of the entire system, because often when branches are closed and advisors sacked, customers are lost. And if every time we lose customers, we lose revenue, we are going to be forced to make further cuts and therefore fresh attrition results. The process is endless.

Of course, we must have optimum cost management but, ultimately, all businesses always need that. We must, on the other hand, guard against falling into the circle of attrition.

So what then is the answer? I said firstly invest heavily in digital and make ourselves at least as practical as online banks. I can tell you that most banks in France today have become or are becoming as practical as online banks. But the answer is also to take due account of the fact that online banks themselves only meet some of their customers’ range of needs.

Online banks focus on transactions. They cannot offer advice since they are not advisors. While they are gradually gaining customer advisors, they then need to be accommodated somewhere, be paid, and they need to be trained. This means their costs would rise significantly, and they would therefore no longer be low cost. Eventually, we could then see business models converge. But meanwhile, they do not have customer advisors.

What is the other part of the banking model covered by conventional banking in France? What I call relational banking. Relational banking means banking advice, banking for all of life’s plans. The bank incorporates both models and coordinates one with the other, as I was saying. In relational banking, advisors support their customers’ plans for the future and businesses’ plans. These might be major personal plans, buying or extending a home, starting work, preparing for retirement, preparing a will, preparing for children’s education. They might be minor plans, a luxury trip, the purchase of a car, etc. All this is in actual fact dealt with over a long timeframe. In the way that the transactional bank operates in a short timeframe, so the relational bank operates in long timeframes, because future plans require preparation before they are then acted upon, and they tend to happen gradually. And which are the bank products that match that description precisely? Loans, savings and insurance. These are all products that operate gradually, over a period time. So one has to save up in advance before preparing for some future plan, or save after obtaining the loan that was spent on one’s plans. French customers generally do both at once. Insurance naturally protects their property and their family. All these products constitute a comprehensive range of banking services, suited to all plans customers might have, supporting those customers and finding solutions for them and their families.

So, with supermarkets, the timeframe is immediate, not a long period. When you go to a supermarket, or any type of shop, the act of purchase is in the here and now. If you are not happy with a product, you can change brands the next day. If you are not happy with a shop because it doesn’t stock the brands you like, you can change shops the next day. There is no long-term relationship. This is also why there are fewer and fewer sales assistants in shops. They have been replaced by rows of shelves and self service. In contrast, in banking for customers’ plans, we are looking at the long run. As a result, when major retailers thought about including banking services, they stopped at consumer credit, which is the exact link between short and long term. They have stopped at payment methods, where appropriate, to expand their loyalty cards, but have not moved on to the rest. Some supermarkets have tried, but they never quite managed to sell shrink-wrapped savings accounts. For the same reasons, I think relational banking does have a future, because it meets an interpersonal need for support and guidance over the long term.

Let us delve a little deeper. Is this true is all countries? Not really. In some European countries, and more so in the English-speaking world, banking has been fragmented for a long time. Perhaps indeed banking has never been unified. In the United States, it is not uncommon for someone to have one bank for payments, consumer loans with specialist lenders, a property loan from another specialist provider, and investments placed with brokers. It is actually the usual state of affairs. In countries where banks are predominantly for transactional purposes, the strategy of severe cost cutting is inevitably followed. But France is a country where relational banking is a strong factor.

Second point. Online banks which have existed for a few years, although they are still young, are not profitable. Not one in France makes any money. Why is that? Because it is very difficult, even when costs are pared to the bone, to give customers more and more, and retain them. And that is because there are no customer advisors. Furthermore, they do not have the presence on the high street to attract new customers that we have. Obviously not, a low-cost, online bank by definition does not have a high street presence. Therefore to attract customers, they are forced to hand out the freebies you all know; €80 for a new customer and a bank card, typically for life, albeit under certain conditions. This costs online banks a great deal. Moreover, at least €50m of advertising per year is needed to sustain the brand and be in a position to acquire new customers. All in all, customer acquisition is extremely costly.

However, once the necessary investment has been made to increase the practical usefulness of banks and make them comparable with online banks in this respect, is the lion’s share of the work complete? Is differentiation by having customer advisors enough? Is the relational aspect well perceived by customers and do banks keep their word in this area? Because if the relational aspect is pointless, why then do customers not go to the cheaper online banks? Can we assume that, in the field of relational banking, traditional banks are fully up to speed? Of course not. We still need to move forward and improve upon our own business model, i.e. leveraging our differentiation. And it is by improving our differentiation, promoting it more, making it even better, more visible, more tangible, that this differentiation will probably enable us to survive and even continue to grow. In fact, by making our relational service promise both credible and demonstrable.

For example, regardless of the bank, it is possible from time to time to have advisors who know less than their customers. It is also possible to have advisors who change a great deal, every year or year and a half. As a result, long-term relationships are not established, and good customer knowledge fails to take root. I could obviously add many more items. For example, perhaps from time to time there is a lack of responsiveness in banks, service levels that are not always pushed to their maximum, and so on.
It is therefore essential for our banks, and this is what we have been doing unassumingly at BRED for the last five years, to improve this model, to drive it to its best level. One example is that our customer advisors stay in the job for three to five years with the same customers. Another example is ensuring that customers are segmented properly, on the basis of the greater or lesser complexity of their requirements, in order to place them with advisors with the skills to match. Or for example by substantially increasing the amount of training taken each year.
Incidentally, as the world goes digital and turns to robots, I am convinced that the only way to defend work in developed societies like ours is to increase the added value delivered. This is the knowledge society. It is the innovation society. If we seek to lower costs in the fight against cheaper labour in emerging countries or against imminent robots, we have already lost. It is, of course, possible to have maximum efficiency and optimum costs. These are the basic rules of business, as we have reiterated. But we must also bank on the knowledge society (pun intended). To use BRED as an example, in the last five years we have increased the training budget by 40% and now have a training budget equal to approximately 6% of the wage bill, while in France, as you know, the legal minimum is 1%. We are therefore trying to “take the high road”.

It also means changing sales methods. Meaning we don’t sell the product as the product, we analyse a customer’s requirements, which changes everything. We then look at how to offer solutions appropriate to individual circumstances, using the range of products and services we have. Our role is not to promote a product and push it onto all customers.

We obviously make use of digital there too. Consequently, we don’t only use digital for processes and we don’t only use digital to make life easier for our customers through the quality and utility of our smartphone apps, etc. We also use digital for what is known as “big data” and for processing customer data, and thus give as much information as we can to our advisors as input to best prepare for customer appointments, to deliver the best advice and the highest possible added value.

So to “take the high road” and avoid “Uberisation”, a great deal of investment is needed, consistently and following an appropriate strategy, in both digital and human capital.

Further, the number of customer appointments is in actual fact not falling, although customers no longer visit branches as much. The number is increasing, but these appointments can easily take place over the phone, or using online chat, email, etc. They are real appointments that take some time, appointments to analyse requirements and put solutions in place. Digital tech makes for better preparation for appointments, and enables us to sell products remotely when customers do not wish to travel. But always with an appropriate advisor.

It is therefore vital to put our promise of relational banking into practice and to make sure this is seen by customers to be the case, so they have no desire to leave us.

This seems to me to be the key to success. Being at least as good as online banks at the transaction side of our work. And affirming and enhancing our winning differentiation through the excellence of our relational banking model, as an advisor bank offering customers added value, which online banks, by virtue of their structure, are unable to do.

Ensure that the human factor is ever-present, essentially, because human decisions are decisions taken by both the head and the heart. That is how the decision-making process works. Rationality alone is not enough. The right decision is still something “felt”, so cognitive science teaches us. That must entail human contact, which is therefore crucial. This is and will be our winning differentiating factor: an overall model built on close relationships, augmented by technology.

THE CHAIR:

 Thank you Monsieur Klein. Now it is time for questions. I will ask the first one.

What is the banks’ attitude towards crowdfunding? Crowdfunding platforms are currently springing up. What do you think of them, what is your response?

Olivier Klein

 I have a slightly iconoclastic point of view on this subject.

Crowdfunding for borrowing must be distinguished from crowdfunding for private equity. For private equity, I’m in favour, because people will place a small amount of money with platforms that will invest in small business with significant growth potential. If that money is lost, too bad. If the capital grows, then great. It is just private equity through the intermediary of a platform.

For borrowing, I’m much less in favour. That does not mean it will not develop to an extent, but it will probably stay fairly minor. I absolutely do not believe it is a route to serious disintermediation of banks. The economic and social utility of a bank lies in the fact it takes the risk in place of its borrower and lender customers. What are these risks? First of all, credit risk, naturally. If you deposit money with the bank, you do not take the credit risk that the bank takes. Unless the bank goes under. In France, that is not something we often see. The cost of credit risk has no kind of consequence on the savings you have deposited. When you lend money on a crowdfunding platform, naturally you are subject to all the credit risks taken by the platform, and you shoulder that risk euro for euro. Meanwhile, the bank alone bears this risk in its own profit and loss account. A crowdfunding platform has just gone bust in the United States. The second and third kind of risk taken by the bank are connected to the fact that the bank, by creating credit and borrowing, generally borrows short term from customers (deposits) and lends long term (credit facilities). There are therefore two risks the bank takes on behalf of either borrowers or savers, and these are interest rate risk and liquidity risk. Banks regularly absorb these risks in their profit and loss accounts, and do not pass them on to customers. Moreover, banks are trained in managing these risks and are also regulated to manage them prudently. On crowdfunding platforms, this is absolutely not the case. Neither does it apply to investment funds, which increasingly undertake non-regulated banking, shadow banking.

Such risk is completely absorbed by investors, or even borrowers.

Question

Who issues bitcoin, who manages bitcoin and blockchain? How do we get access to information?

Olivier Klein

 In my bank, we get questions from customers asking what we think of bitcoin and other crypto-currencies. Crypto-currencies are not true currencies in the sense they keep none of the liquidity value invested in these “currencies”, as their price can rise or fall very sharply. These “currencies” have no stability, and are not even nominally anchored. There is no lender of last resort, there is no central bank and, structurally, given what I have just said, there is no stable relationship between currencies. They are private currencies being issued, and that is how I answer your question. They are issued by private concerns who decide to launch a crypto-currency. Private concerns who launch these create a new “currency” and are entitled to take a small percentage of the amount they create themselves. I find that extraordinary.

It should be recalled that in the 19th century, central banks started to be established because private currencies were leading to major financial crises, with unpredictable swings in value; the whole thing collapsed regularly with major economic crises the result. Are current crypto-currencies founded on credit? No, there is no lending. Are they founded on the value of a precious metal? No. They are purely speculative and the whole scheme is hugely similar to tulip bulbs in Holland in the 17th century which caused a major speculative crisis.

Question

 Don’t you think that in the banking industry, you tend to compare traditional banking with online banking, but rather than considering online banking as a competitor would it not be worth considering it as an additional product that you could offer those of your customers looking for another kind of customer experience and another form of relationship with their bank?

Olivier Klein

 A very good question, and there are banks that have built online banks internally, and at BRED we have one called “BRED Espace”. So I really am not against online banks.

BRED’s online bank is not a low-cost online bank, and nor are those of other banks in BPCE Group. It is a bank that does everything online for people who do not want or really cannot have any kind of relationship with a branch, because they don’t have the time or because they are abroad or for a thousand other good reasons. It is also intended for students who so wish. But all these customers have a qualified advisor. We also encourage a close relationship, even if no branch is involved.

It is indeed a smart move to include online banks for some market segments. If it results in sustained losses, it is of no interest. But if models are found that can generate profits over marginal cost, naturally it could be of interest.

Let us return to the topic of blockchain. Crypto-currencies work using blockchain, but blockchain is a technology used for many other things. It is a technology that is, as you know, highly decentralised. Digital tech goes very well with decentralisation. It even facilitates it. These are therefore what are called miners, companies that develop computer data processing capabilities, storing data by multiplying checks against each other and ultimately certifying the genuineness of something. It could be a certificate, title deed, etc. So, it could be used in some African country to replace a non-existent land registry; or between banks to replace the securities custodian system on behalf of customers, etc. At BRED, we have even developed the ability to use blockchain to check customer identities, especially at the start of the relationship, because banks are now under a regulatory obligation to “know their customers” and confirm their identities. We have therefore developed a service that makes it possible to check numerous points within a few seconds, often using blockchain, to certify the identity of future customers.

So blockchain really cannot be reduced to crypto-currencies alone. The only problem with blockchain is that this way of doing things uses vast amounts of energy and ecologically speaking is probably a disaster. But technologically speaking, it is of great interest.

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Bank

Press Release – 2017 BRED Banque Populaire’s results – Growth of the Net Banking Income for the 5th consecutive year

Please find here the press release announcing the BRED Banque Populaire’s results in 2017.

Press Release 2017 BRED’s Results

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Bank Economical policy Euro zone

Low interest rate and negative interest rate policy : reasons and consequences for the banks

Revue-De-léconomie-Financière-Extrait-du-numéro-125-Article-Olivier-Klein

Categories
Bank Economical policy Euro zone

Fourth edition of the “Rencontres du financement de l’économie” (Financing of the economy conference) : the possible evolution of monetary policy and interest rate policy and the consequences on the economy and on banks.

Whereas the Euro Zone is at a crossroads and the governments of the member states are taking a close look at the way it works, Olivier Klein takes a look here at the possible evolution of monetary and interest rate policy in this context.

The possible evolution of monetary policy and interest rate policy and the consequences on the economy and the banks.

Are interest rates going to rise and what are the fundamentals which would justify it? What are the effects of the low interest rates on the economy and on the capacity to finance the banks?

An initial, rather general but fundamental thought: the very low interest rates are not a phenomenon due exclusively to the central banks. It can be seen that growth has started again, both in the United States and in Europe. This is good news. This will probably drive internet rates up. But since the financial crisis we have seen a period of very low growth with a global overproduction crisis, which has led to very sluggish supply and demand. Clearly low demand and a high level of saving combined with low investment are the manifestation of global overproduction. Similarly, low gains in productivity and declining global demographics – apart from in India and in Africa – are keeping supply sluggish. The simultaneity of sluggish demand and supply has resulted in very low growth rates and naturally reduces interest rates.

If the markets were working well and if the economy spontaneously self-regulated, interest rates would return to so-called natural levels. In economic theory these natural rates are those which equalise saving and investment at a level of full employment. It just happens that this is a rate which cannot be observed, it is a rate calculated by economists. And these calculations lead to extremely low interest rates. Sometimes it is even calculated that these rates should have been negative to equalise demand and supply, i.e. savings and investment, at a level of full employment. Particularly in the eurozone.

It can thus clearly be seen that it is not only the central bank which is pushing interest rates down.

This leads us to think that not so long ago we were in a period of secular stagnation, the effects and reasons of which we all know, in other words, at least since the crisis, a classic period of debt reduction with very low growth, which occurs after all the major over-indebtedness crises, such as that we witnessed from 2007 onwards. Both are possible at the same time, at least temporarily. In both cases this justifies extremely low interest rates.

To these considerations must be added the fact that the brutal financial crisis we have witnessed has brought us into a period of major deflagration with a very high risk of deflation. To fight against this deflation the central banks have pursued extremely aggressive but necessary policies. All the major central banks have acted by reducing interest rates even further than the markets pushed them to, in other words below neutral levels. As we know, the neutral level is equal to the actual growth rate plus the inflation rate, thus to the nominal growth rate. When interest rates are pushed below neutral rates this is done because we want to reinvigorate growth by pushing inflation up again – and thus avoid deflation – and, of course, in order to limit the risks of an over-indebtedness crisis to prevent the “snowball” effects on debt due to nominal interest rates above the nominal growth rate.

When there is extremely low growth and virtual nil inflation we face the zero lower bound. Monetary policy and self-regulation of the economy are thus constrained in principle by the impossibility of bringing interest rates below zero, whereas they should be to rebalance supply and demand at full employment level. In France, for example, the banks cannot propose deposits at negative interest rates, except to major institutional clients. We are limited to this zero rate. It can clearly be seen that this may be a trap for a lasting situation of under-balance. If interest rates cannot fall sufficiently low, the consequence may thus be to remain in a situation of under-balance, of under-production, with lasting under-employment and with a persistent risk of deflation. With interest rates which, although very low, no longer have enough spring to rise back, because they should be even lower.

If we now return to the effects on the economy of the very low rates, they are well known. In principle they drive growth back up by an in initial effect, the stimulation of consumption and investment and the reduction of the attractiveness of saving.

The second effect is the wealth effect. The drop in interest rates drives the price of wealth assets up, be it property or shares, which in turn bolsters consumption and investment for both households and companies.

In 2007 debt levels of private agents in the most advanced countries reached extremely high levels. This over-indebtedness crisis, which is the fundamental reason behind the financial crisis we witnessed in 2007-2009 led to an over-indebtedness crisis for countries. From 2008-2009 onwards countries ran up high levels of debt to meet this financial and economic crisis. This led a certain number of countries to situations of over-indebtedness, thus joining the situation of the private players.

This naturally led, as always in financial history, to great periods of painful debt reduction which potentially asphyxiate growth.

The effect of very low interest rates, lower than the neutral interest rates, enables these periods of debt reduction to be facilitated. As previously mentioned, this enables the well-known “snowball” crises to be avoided. If interest rates are above neutral rates and if there is a high level of debt, debt snowballs because the debt interest must be financed by increasing the debt itself. Conversely, if we have interest rates below neutral rates debt can be reduced less painfully. Obviously this is what the central banks have done by greatly reducing their short interest rates, down to zero. This is usual in monetary policy. The new feature by the central banks was to bring certain short interest rates below zero to avoid the zero lower bound. The ECB initiated a policy of negative interest rates on bank deposits at the central bank. We are at -0.40% today. If the ECB did it, it is probably because the natural interest rate in the eurozone is negative. It is also obviously a way of encouraging the banks not to hold on to cash reserves at the central bank but rather to use them to grant more loans. This is indeed what happened, moreover. The banks considered that it was better to grant loans, even at 1.50%, rather than lose -0.40% leaving cash in the central bank. This meant a differential of 1.90%. All the banks were therefore encouraged to grant more loans. And this pushed interest rates down again since the credit offer increased and competition between the banks was thus fiercer. So the banks lent more, within an intelligent central bank policy, even if it is not very usual and even if, obviously, it involved risks.

Moreover, as in the United States, but later, the ECB took more radical measures in the shape of quantitative easing, in other words developing its own bank balance by directly buying public and private debts. In reality this involved giving itself the means to control long interest rates, too, whereas the traditional practice of the central banks is to control the short rates. It had to control long rates to bring them to rates which were compatible, in particular, with the budgetary solvency trajectory of the nations. Between 2010 and 2012 we entered a major crisis in the eurozone, a highly risky period since a contagious defiance had set in where we had the following catastrophic dynamic: fear as to the solvency of the public debt which pushed interest rates on public debt upwards, which in turn reinforced the insolvency risk. The extraordinarily welcome policy of Mario Draghi was to initiate quantitative easing to reduce countries’ long interest rates, ending the vicious circles. Without this the eurozone would probably have exploded. His famous “whatever it takes” was a salvation.

We well know that quantitative easing has consequences on foreign exchange. The foreign exchange level may, however, under certain conditions, help increase the level of growth. There have been attempts to reduce the dollar or reduce the euro, etc. by the central banks concerned, via quantitative easing policies.

The question we are asking ourselves here, today, is how long can the very low, or even negative, rates continue and have we definitively moved into a phase of increased interest rates? And if the answer is positive, at what speed will this increase occur?

At the peak of the crisis in 2008-2009 I was persuaded that the very low long interest rates would be lasting. I wasn’t totally wrong as we are in 2017 and they are still extremely low. For me they were lasting due to the context and the reasons I just explained. Why might we change our paradigm now and think that the rates may rise again?

I said it earlier. Firstly, because there is a return to growth and nominal interest rates are quite strongly determined by the nominal growth rate. With the nominal growth rate rising all over the world, this is a good reason to think that interest rates must rise.

In other words there are brakes and problems that may ensure extremely low or even negative interest rates may last a long time. The first brake is that the very low long rates policy may not work. It is not enough to reduce interest rates to encourage companies and households to borrow. This was indeed the case in France in 2014, when interest rates fell sharply. Lending did not return to growth straight away, and this was not attributable to the banks, which would have liked to grant more loans. There was simply a problem of demand for credit, because everyone was in a sort of depression where nobody wanted to borrow more. Finally, at the end of 2014 and in 2015 growth in the loan mass was seen in France, due to the very low interest rate policy. This brake no longer exists, therefore, since we have demand for credit which is, in our opinion, insufficient, but in any case at a good level.

In parallel, in principle, very low interest rates discourage saving. But interest rates must be compared to inflation. We have very low interest rates but also very low inflation. Overall savers have not been badly treated, at any rate less than in the years where interest rates were much higher than today but lower than inflation rates. But there is a psychological effect to having very low interest rates. Many households consider that they are not managing to constitute gradually the savings they would like to have when they retire because interest is not high enough to capitalise at a sufficient level to reach these amounts; they will possibly save more and consume less to ensure themselves the levels they want later. In this case, the effect of very low interest rates may be exactly the contrary of what is expected according to traditional economic theory. Today the effect is not clear-cut. We can clearly see that the very low interest rates have not significantly discouraged saving. But this effect may occur sooner or later.

The third brake on very low interest rate monetary policy is that the wealth effects, which are strong in the United States, are less strong in Europe, notably because the composition of household savings financial portfolios is not the same at all. It is based far less on shares. It is composed more of money market products and property, etc. Thus, the wealth effects are much less evident econometrically across Europe.

Two risks must also be taken into consideration. The first is to see the return of speculative bubbles. As interest rates are very low, it is easy to borrow to become a buyer on the wealth assets market. This could lead to the development of bubbles.

Today, and at least a few months ago, we could not really see signs of a bubble. No property bubble is apparent in Europe. Nor is there a clear bubble on the stock market, at least in Europe, even if, in the United States, I am not at all sure that certain sectors are not already overvalued. This risk, although not yet proven, nonetheless exists, especially if such a situation regarding interest rates were to continue further.

It can also be seen that institutional players are having difficulty in meeting the yield obligations they may have, whether it be pension funds, health mutual insurers or investment funds. The buying of much more risky assets than those made previously is also starting to be seen. As everything which presents little risk has a virtually negative return, a trend towards much more risky assets can be seen. The next change in the economic environment and market may result in loan and bond defaults. In short, more fragile balance sheets.

There is also a risk on the banks. We well understand that they need an interest rate slope to ensure profit margins. Why? Because, basically, they borrow money from depositors at interest rates linked to short interest rates and they predominantly lend at long fixed rates. A drop in interest rates during the transition period is not, in general, good for the banks. But after the transition the banks should be able to restore their margins. If we were, before the transition phase, at a 5% credit rate on average on stock and at a 2.50% rate on deposits, for example, and if we return, after transition, to 2.50% and zero respectively, the bank’s margin rate is indeed reconstituted. Since today all the long and short rates are all around zero, the credit rates on stock are falling incessantly in banks’ assets and the deposit interest rates can practically fall no more since they are practically at zero and they cannot become negative. We are faced with the zero lower bound phenomenon. And this is leading the commercial banks in France to see their margin rates, and thus their income, fall inexorably.

But there are other effects that the central bank highlights, and rightly so. According to it, because interest rates are low, the credit volume may bounce back up. That’s true. As I said, from the end of 2014-2015 onwards, that’s what has happened in France. We have seen a positive volume effect on loans which has enabled the negative interest rate on commercial bank net interest margins to be compensated. This was exactly the case in 2015. In 2015 half the commercial banks in France had a net interest margin which fell slightly, the other half which increased slightly and, in total, the banks saw an aggregate net interest margin which was unchanged. This was no longer the case at all in 2016. In commercial banking in France in 2015, Net Banking Income did rise by 1.8 %, because the volume effect compensated the interest rate effect, as we have just seen, and commission rose slightly. But in 2016 NBI fell by 4% on average because the volume effect was less than the cumulative interest rate effect, despite the increase in commission. Even if interest rates are now stagnating, or even if they rise very slightly, the drop in the stock interest rate due to the natural repayment of old loans or renegotiations, or early repayments, would lead to a falling interest rate on stock.

The commercial banks are thus entering very troubled waters. The European Central Bank replies, rightly, that thanks to the fact that interest rates are very low, which has also reinvigorated the economy and French and European growth somewhat, the cost of the credit risk has also fallen. It is right. In 2015, commercial banks in France saw the credit risk cost fall by 12.2%. In 2016, it fell by 14.2%. So, if I now take the NBI variation less the credit cost variation to analyse the overall effect, what do we see? For all the commercial banks in France, in 2015, a net positive effect of +3%; but in 2016, a negative effect of -3.3%. In other words, the drop in the cost of loans in 2016 was not sufficient to compensate the fall in NBI caused by the interest rate effect.

Also, the fall in the cost of risk cannot be lasting. The effect of the falling credit stock interest rate is lasting, however. The fall in the cost of risk is not lasting, in fact, since a mere slowdown in the economy would drive this cost upwards. We cannot wager on that compensating lower NBIs in the long term.

The question which can be raised is, fundamentally, whether this very low or even negative interest rate policy in Europe is desirable or not. Certain economists say that it was and is very dangerous. I do not share this judgement. I think it was perfectly desirable and that the favourable effects, as the ECB rightly says, have far outweighed the risks taken. The risks it took had to be taken, because the risks which would have existed if it had not carried out this monetary policy would have been far greater: deflation, prolonged stagnation, etc.

Where does that leave us today? Firstly, it must be acknowledged that the return to growth in many parts of the world legitimises an increase in interest rates, as we said earlier. The Fed is pushing them slowly upwards, but with fresh uncertainty over Donald Trump’s policy and its possible consequences for the American economy. The dollar rose but is now falling again. It can clearly be seen that the markets are uncertain regarding the success of the Trump policy or, on the other hand, the problems it may cause. And then the Fed is increasingly sensitive, rightly in my opinion, to the effect of an increase in interest rates in the United States on emerging countries. To a certain extent, it is the Fed which defines the monetary policy of emerging countries which very often have currencies linked to the dollar. It can clearly be seen that if the Fed increases its interest rates too quickly, it will partially cut the financing of emerging countries. It is a classic effect which means that when interest rates are very low in the United States, stakeholders borrow dollars there to invest them in emerging countries which have far higher growth rates and thus far higher interest rates, thus benefitting from a highly favourable transfer. If interest rates rise in the United States the money will be withdrawn from the emerging countries and return to the United States. This can, then, create profound crises in the emerging countries, as we saw a little over a year ago, when the Fed increased or threatened to increase its interest rates. So the Fed will be prudent in increasing its interest rates, I am certain, being very conscious of these two phenomena.

As for the ECB, I think it understands the challenges very well and that it has manifestly acted well until now. It must nevertheless face up to several new phenomena. The first is that the effect of the low interest rates is starting to fade and even become dangerous, as stated earlier. I took the example of France but it is also true elsewhere and the French banks are among the most solvent. They are in excellent health compared with Germany or Italy. But you can see that even the French banks are affected in their commercial banking business in France.

At the same time, let’s not forget that we are asking the banks to increase their solvency ratios very significantly. In general, since Basel III, they have been asked to double their so-called “hard” equity. It is difficult, however, to ask the banks to greatly increase their solvency ratios, and thus their equity, at the same time as reducing their profits. Growth must not, for example, take off again more strongly while the banks are caught in a trap, unable to sufficiently follow the excess credit demand which would result from this.

Fundamentally we clearly understand that the ECB thus initiated this policy – even if it does not say so – to facilitate the budgetary solvency trajectories of the various eurozone countries, as we have observed. In reality it has bought some time. The ECB “deal” is clear. It is carrying out an extremely low interest rate policy pending two things from the nations. The first is that they carry out the structural reforms necessary to increase their growth potential and reduce their structural deficit, thus facilitating their future budgetary trajectory by protecting their solvency. The second is that they constitute the institutional conditions of a viable eurozone. We know today that the incompleteness of the eurozone is manifest in terms of institutional arrangements, in other words the ability to make the zone work without it necessarily always being up to the countries doing least well to incur the cost of the necessary adjustment, with the consequences on votes that we know. The ECB is saying to the member states: “Quickly organise the eurozone a little better”.

The problem we face today and which leads me to question the increase in interest rates in the eurozone, is that the countries which should have done so have not done this work. The structural policies have virtually not been carried through where they were necessary. This started in Italy but was stopped following the failed referendum. In France we have not done much. There will be no capacity for exiting the dangerous solvency areas of the countries concerned if there are not, on the one hand, these structural policy efforts and, on the other, the completion of a more complete, better regulated eurozone which works better, in other words less asymmetrically.

The Germans, however, severely criticise the ECB’s monetary policy which is not necessarily favourable to them. They have a higher growth rate; they therefore do not need such low interest rates. Furthermore, these rates reduce the return on Germans’ savings who, as we know, have a much older population. They thus need a higher return on their savings, even more so for institutional investors who had, in the past, sold annuities at fixed rates.

The head of the ECB is not wavering from his policy. As for the Germans, they are obsessed with the question of the moral hazard, insofar as they do not want the solidarity factors necessary to the eurozone. They refuse, and this can be understood, to be the only ones to pay for everyone if the others do not make their structural reforms, thus finding themselves sooner or later in a situation of being dependent on Germany in the long term.

Exiting low interest rate policies is therefore conditioned by the fact that France in particular is carrying out structural reforms which reassure the Germans who would thus accept a much better institutional arrangement for the running of the eurozone, with intra-zone solidarity factors so that the cost of the adjustments does not weigh on the weakest countries.

This is where we currently stand. The European Central Bank, it seems to me, is going to exit negative short rates sooner or later because this position is becoming difficult to maintain today. But exiting a very low interest rate situation will depend fundamentally on the capacity of countries to carry out their own reforms and simultaneously integrate the reforms of the eurozone necessary for its future. In 2019 when Mario Draghi’s term of office ends, everything will depend on the relative strength of the countries and on their respective abilities to be heard, in other words to have triggered the structural policies sufficient to be credible. This credibility of the major countries conditions the possibility of increasing the viability of the eurozone, by developing several federalist elements, such as the mutualisation of part of the sovereign debts or tax transfer elements, as exists between states in the United States. To support temporarily those going through asymmetric troubles, without asking them to act only by austerity measures.

Which would enable interest rates to be increased much more easily. If we increase them significantly without having done that the intrinsic risk of the eurozone is increased. If we don’t raise them, the risks of a very low interest rate policy described earlier will become increasingly strong, whereas growth is beginning to rise again, along with, to a limited extent, inflation.

Without thinking of a significant rise, what is most likely, in my opinion, is that we shall, at least, see a moderate increase in interest rates from the end of 2017 or early 2018. Short interest rates could come back from their negative territory towards zero. And long interest rates could be managed towards neutrality by the central bank, in other words between 2 and 2.5%. This would be compatible with the level of growth and inflation that we can currently anticipate. This moderate increase will stop facilitating countries’ debt reduction, without, however, propelling them into a snowball effect.