1. Some remarks about bank strategies by Günter Franke University of Konstanz Workshop on Banking Kiev May 19, 2016

2. 3 Topics Handling distressed loans /non-performing loans in the European Currency Union Digitalization Banking without banks?

3. Handling distressed loans /non-performing loans in the European Currency Union Currently about €1 trillion of distressed loans in ECU Concentration particularly high in Southern European countries

4. Handling distressed loans /non-performing loans in the European Currency Union Distressed loans: bank aims to renegotiate/restructure loan together with debtor keeping debtor alive and maintaining relational banking with debtor Non-performing loan: bank sells loan to third-party (vulture funds, bad banks) which often aims to maximize cash flow from liquidating assets often debtor´s existence jeopardized, relational banking stopped

5. Why sell NPLs? NPL-book value very risky, even after write-off → strong capital buffer required NPL-management different from management of distressed loans → better to transfer management to specialised firm Bank management not distracted from new business by NPL-management Bank reputation would be endangered by its NPL- management

6. Who should bear losses? New European Single Resolution Mechanism Concept shareholders of bank: first loss position bail in-creditors: second loss position private safety net of banks:third loss position European guarantee fund: fourth loss position

7. Who should bear losses? Practice: Governments refuse resolution mechanism unless forced ECU Italian depositors lost money in bail in Italian government and ECU revised bail in-losses € 340 bio NPLs of Italian banks semi-private funds with 6 bio € equity to buy NPLs

8. Who should bear losses? Should equity owners and bail in-creditors bear losses generated by political risk factors? Or tax payer? In case of high NPL losses, equity owners and bail in- creditors can bear only part of losses. Indemnifying equity owners and bail in creditors against losses creates strong moral hazard of banks

9. Who should bear losses? Taxpayer may support bank by providing new equity or guarantees, compensated at market rates Greece 2015: 4 systemically relevant banks -- got new equity from private investors and ECU, each € 10 bio -- previous government stake basically worthless

10. Tradability of NPLs? Transfer NPL to vulture fund to private bad bank to public bad bank ECU tries to establish market for NPLs

11. Digitalization Internal organisation: Many standardized human jobs replaced by IT for example, more electronic credit screening “ “ reporting “ “ compliance checks Block chain technology as big cost saver?

12. Digitalization Bank-customer relationship: convenient payments with mobile phones international electronic payments robot advice of customers collecting big data about customers to support cross selling

13. Digitalization Should bank buy new ideas of digitalisation or develop them internally? Banks do both. Many start ups: ~ 5% succeed others are taken over by banks or disappear Very difficult for start up to operate independently of bank because of lack of customer base No protection of intellectual property

14. Banking without banks? European Capital Market Union: To stabilize financial markets, promote lending: -- default risks largely borne by non-banks -- without banks Payment systems without banks exist. Trading platforms without banks exist.

15. Credit business without banks? USA: volume of electronic lending platforms increases but volume still modest Europe: still much smaller volume Functional approach: Which functions are important for effective lending?

16. Credit business without banks? Functions in lendingBanks Non-banks Niche players Credit screening standard ++ niche ++ Monitoring the borrower standard ++ niche ++ Renegotiating loans/bonds standard ++ niche ++ Managing Non-Performing Loans -- (--) (--)

17. Credit business without banks? Bond financing for SMEs? In most countries so far ineffective Transaction costs too high for small bonds

18. Credit business without banks? Conclusion: Banks are experts for most lending functions in particular when borrowers are opaque Politics should promote syndicated lending, i.e. lending with banks in charge of main functions and risk sharing with non-banks Lead bank should retain sufficient share of default risk to constrain adverse selection and moral hazard