With a career in banking that has spanned 30 years, Guy Hoffmann has seen his sector change beyond recognition. As the CEO of Raiffeisen takes on the role of chairman of the Luxembourg bankers’ association (ABBL) he is very much aware that the image of his industry has been tarnished since the events that led to the global crisis of 2008, yet he questions the efficacy of the subsequent influx of regulation over the last 10 years, saying the cost of compliance could actually be increasing banks’ exposure to risk.
“We are the authors of our own bad image,” Hoffmann said, “and it is up to us to improve it, but we need to find the right balance of regulation.” The Luxembourg regulator (CSSF) recently published the figures for the banking sector, announcing a decline in results of 15.4% to €5,345 in 2017, which it explained as largely due to the cost of compliance. According to Hoffmann, this is money that banks cannot invest, “If 50% of our investment capacity goes into regulation, we cannot create and develop other services for clients.”
“In the US, they are trying to be proportional and reduce banks’ costs, but here in Europe we are building walls and becoming less competitive. Ten years after the crisis we need to review our regulations and ask are they working? Do we have enough proportionality? I believe not.”
He explained that small retail banks are not exposed to the same risks as investment banks and yet are subject to the same level of regulation. “This is not reasonable and runs the risk that only a handful of bigger banks will be able to compete, which goes completely against the “too big to fail” idea. We need a solid distribution of different sized banks on the market.”
That said, Hoffmann admitted that, “There have been some excellent measures since 2008, and banks are safer as a result, but there are many that do not add value and even the big banks are having a tough time developing a profitable business model.”
However, it is not all about regulation, even if anyone in the process of implementing GDPR and PSD2 might disagree. For Hoffmann it is important that the banking sector doesn’t get stuck on regulation but also sees the bigger picture.
“I am positive about the future, although the sector is changing a lot and may look very different in a few years’ time. Luxembourg plays in the premier league of financial centres, creating about 30% of the country’s wealth and employing about 26,000 people. But we have to ensure that we continue to do so.”
In Hoffmann’s view banking as a career has lost its flair and needs to be revitalised. The problem is getting young people to see it as an interesting career. “We cannot compete with civil service salaries. How can we encourage young entrepreneurs when there is this kind of difference?”
He believes part of the solution lies in financial education. “Many people do not even have the most basic financial literacy, both children and adults. We need to work more closely with schools and the university on this.”
Above all, Hoffmann is concerned about the cost of doing business in Luxembourg. “We don’t want to be the cheapest, but we certainly want to keep a lid on it. Why not a flat corporate tax rate of 21%? This would attract more external investors.”
What we mean by…
ABBL: “Established in 1939, the Luxembourg Bankers’ Association (ABBL) is the […] professional association representing the majority of financial institutions as well as regulated financial intermediaries and other professionals established in Luxembourg […]” (Source: abbl.lu)
CSSF: “The public institution which supervises the professionals and products of the Luxembourg financial sector. It supervises, regulates, authorises, informs, and, where appropriate, carries out on-site inspections and issues sanctions.” (Source: cssf.lu)
GDPR: The General Data Protection Regulation is EU regulation on data protection and privacy for all individuals within the European Union. It has huge implications for any organisation that collects or handles the data of EU citizen in any way and came into effect on 25 May 2018.
PSD2: Described as “the directive that will change banking as we know it”, it is a revision of the Payment Services Directive implement in 2007 to create a single European market for payments. It enables bank customers, both consumers and businesses, to use third-party providers to manage their finances, meaning that banks no longer just compete with other banks but may other players too.