The future of the banking industry: Rabobank’s vision
Banks play a crucial role in payments and lending to private individuals, businesses and other institutions. Serious things have gone wrong at various banks and as a result the sector is now in the midst of a social debate on its future position and role in society. Rabobank thinks it is right that this debate is being conducted and is convinced the banking industry must be reconsidered. We are taking part in this debate on the basis of our vision on the future of the banking industry.
Read more about the following topics here:
- What banks do
- There are lessons to be learned
- The importance of a shared vision
- Systemically important banks carry a large responsibility
- Putting customers’ interests first
What banks do
Banks play a major role in the economy. They provide loans to private individuals and businesses on a daily basis. In doing so they give homeowners the opportunity to find quality housing and build up equity. They help businesses to realise their investment plans and to finance foreign trade.
Banks assist customers to hedge their risks and furnish them with financial advice. Banks also process millions of cashless payments every day – error-free and very inexpensively. A modern economy cannot survive without an efficient and safe circulation of money.
There are lessons to be learned
Serious things have gone wrong at various banks in recent years and as a result the sector now finds itself at the centre of a social debate on its future position and role in society. The world economy has been in the grips of a financial crisis for several years now. History shows that financial crises occur from time to time, as do economic cycles and public financing crises. Rabobank does not, however, believe this historical knowledge releases us from the obligation to learn as many lessons from the crisis as possible. The banking industry is making a steep learning curve.
The importance of a shared vision
Rabobank is of the view that, if the banks want to still perform their role within the economy and society effectively in future, there must continue to be sufficient scope for innovation and enterprise within the sector. If this scope becomes overly limited as result of a stacking of legislation and regulations, the sector will come under sustained pressure. And the economy as a whole will ultimately pay the price for this. Society must also consider the real question: What can and should we expect from our financial system?
Systemically important banks carry a large responsibility
Rabobank’s vision is that the objective of banks in general and systemic banks in particular should be to serve the real economy. They play a crucial role in payments and lending to private individuals, businesses and other institutions. This is how they form the financial bloodline of the economy.
This gives banks and bankers a dual responsibility. Firstly, they must carry out their activities in a way that ensures that customers’ interests are served as well as possible. Continuity and consequently a long-term focus must be the top priorities at all times. Secondly, they must ensure that the activities that are financed are at the service of society.
A modern economy must have these banks on account of the central role they play. Large and smaller banks that are relevant to the performance of the entire financial-economic system are designated ‘systemically important banks’. They have an extra responsibility.
Banks’ core functions are processing payments, managing savings and financing the economic activities of businesses and consumers. Banks must provide their customers with access to foreign currencies for cross-border transactions. Banks must be able to raise funds on the financial markets if the available amount of savings is insufficient to finance the lending. This means they must be able to maintain the secondary market for the debt securities they have issued. Customers must also be given the opportunity to hedge financial risks through their bank.
This is why Rabobank highlights the following aspects in its vision on the future of the banking industry:
- Systemically important banks concentrate primarily on customer-focussed activities that are of real economic importance and on activities that ensue from the bank’s own risk management.
- Risk management is a core competence of banking. Systemically important banks must aim for a low risk profile in relation to the credit risk and the liquidity and interest risk.
- Banks’ international activities must facilitate their customers’ international activities and ensure stability and risk diversification.
- Larger banks have various advantages over smaller banks.
- What is the bank’s core business? Limitation holds the key to excellence.
- The banking risks must correspond with the core banking business, be transparent to society and must be controlled as well as possible.
Putting customers’ interests first
It is not easy for a bank to put customers’ interests first because the interests of various groups do not always run parallel. ‘Putting customers’ interests first’ means in practice that a bank must, above all, in good faith weigh the various interests, both those of the customers and of the wider society, and provide openness concerning the choices made. A bank’s range of products must be developed according to customer needs and be subject to fair and transparent terms and conditions. In Rabobank’s view, customers must also be enabled to accept their own responsibility more effectively. A bank must not in any case sell products which it knows do not serve customer interests.
The following topics are also covered in Rabobank’s vision on the future of the banking industry:
- Pricing and profit margin
- Internal bank supervision
- External bank supervision
- The European Banking Union
- The bank tax in the Netherlands
- Financial biodiversity and the future of state-owned banks Deposit Guarantee Scheme
- Remuneration policy