The steps taken to repairthe banking system may temporarily constrain lending, but “we are in a transition to a better world in banking,” said Diego Rodriguez Palenzuela, an adviser to the Directorate Monetary Policy at the ECB.
Speaking at the Irish Banking Federation (IBF) conference, Mr Palenzuela, highlighted the challenges facing the banking sector as it attempts to return to profitability. These include deleveraging; managing loan arrears; the exposure to sovereign debt; and, funding challenges.
Mr Palenzuela, who was the ECB’s lead official in troika negotiations for Ireland, said the comprehensive review of the banking system, which will take place over the next 12 months, will create much needed transparency for the sector and for investors. He declined to comment on the likely outcome of the asset quality review or the stress tests.
Speaking at the same conference, DCU senior lecturer in economics, Tony Foley, said that once the arrears problem is dealt with, the banking system would return to profitability, although it will be much more conservative than the past and generate less returns for investors.
However, the landscape will see significant changes. Internal pressures will come from new regulations and credit review procedures as well as challenges of dealing with data management.
External pressures include technology changes, regulation and the bank levy.
Changes that Mr Foley would like to see introduced include a much more intrusive approach by the regulator into operating costs and revenues; a centralised approach to dealing with mortgage arrears so that all customers get treated in a coherent and fair way; and the establishment of a specialist SME bank.
Bloomberg’s London Bureau chief, Mark Gilbert, sounded a much more downbeat note.
He argued that the incipient recovery across most markets was enabled by financial repression, but as soon as the US Federal Reserve commenced the tapering of its quantitative easing programme, then the recovery would unravel.
Financial market repression is when central banks reduce interest rates to close to zero or negative levels in an effort to stimulate growth. Faced with a dearth of investment opportunities, investors pile into equities and other asset classes.
But Mr Gilbert argued that there has been very little real reform across the banking sector over the past few years.
Consequently, once interest rates started to increase, the financial market crisis would return.
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