On Wednesday 15 December 2021, Luxembourg for Finance (LFF) hosted its last "Focus on" livestream session for this year; the webinar was dedicated to what 2022 has in store for the financial services industry.
This virtual event began with a welcome address by Nicolas Mackel, CEO of LFF, followed by a pre-recorded interview with Yves Mersch, a Luxembourgish jurist and lawyer who served as a member of the Executive Board of the European Central Bank (ECB) from 2012 to 2020. Before that, Mr Mersch was Governor of the Central Bank of Luxembourg (1998-2012).
This interview focused on various topics relating to the financial services industry, from COVID-19 and green finance to the future of money and Brexit.
Regarding the main lessons to be learned from the COVID-19 crisis, Yves Mersch explained that the pandemic had "show[n] again how little we know about the economy and how it reacts", but also how "a common response among European countries and different policy makers has increased the resilience of the economy to a point where we are all surprised now [by the level of recovery]".
Looking forward, Mr Mersch was cautiously optimistic, not least because state guarantees and their impact on risk, as well as monetary policy makers having provided the banking sector with "ample liquidity", have allowed banks to be a "solution" to rather than an "amplifier" of this particular crisis.
Concerning the response(s) of central banks in Europe and beyond, Yves Mersch recalled that central banks are "very cautious by nature". Their main objective is to focus on price stability. As such, central banks are "intent not to derail the [economic] recovery, which still has some uncertainties and frailties". Such uncertainties include the potential severity of future waves of coronavirus infections, the impact of changed working patterns such as remote working on productivity and how economic adjustment and wage developments will look in future. For central banks in general, the main scenario remains returning to slow, pre-pandemic growth levels. "All this does not allow central bankers to go for abrupt measures that derail the economy", added Mr Mersch.
On the subject of the withdrawal of the United Kingdom (UK) from the European Union (EU) and its impact on the future of the EU's financial services industry, Yves Mersch noted that some activities had relocated from London's financial centre to the EU but the latter is still dependant on some infrastructures which have not (yet) relocated. In such cases, "we have to make the best of it". Mr Mersch added: "Finance is going after the best. [...] Competition rewards the best". He also emphasised the need to "nurture our own activities" before seeing more activities move to the EU from London. Despite policy not helping such matters at present, he emphasised that "contact between central bankers [has been] quite good" throughout the crisis and since Brexit, with central banks trying to "minismise fallouts from the policy side".
Regarding capital markets, Mr Mersch lamented that "very little progress" has been made in this area in the EU. He proposed that the EU first fulfil its European banking union promise and then "increase diversification of sources of funding" before focusing on a capital markets union. To achieve the latter, he stressed the need for "more Europeanisation in capital markets, more responsibility for European institutions and less sovereignty and national interference with asset managers".
On the topic of green finance and regulatory versus market-based approaches, Yves Mersch noted that discussions are ongoing and there are "numerous unresolved questions". Despite "having a clear aim", there is "still no clear path to get to that aim", he lamented.
Looking towards the future of money and the possibility of a "digital euro", Mr Mersch stressed that "central bankers must be ready but the public decides when it will be implemented and with which features and particularities". The ECB is currently in its investigation phase and will later submit the project for broad consultation with all interested parties.
He warned of the risks associated with virtual currencies such as Bitcoin, which are "not supervised, not part of a deposit scheme and [have] no need to retain capital" for each issuance. "Virtual currencies exist outside central banks, trust and supervision", he noted. On the other hand, decentralised finance platforms can be "quite efficient", although Mr Mersch expressed doubt that central banks would eventually outsource to private companies; he expected this "red line to remain in future".
Addressing the preparedness of the European financial services industry to respond to cyber attacks, Yves Mersch recalled that cybersecurity falls under national not EU competences. In practice, however, "nationalities are no hindrance to cyber attacks" and a strong response is required at the European level. Moreover, cooperation (such as exchange of information) with non-EU allies is important. He emphasised the need to "increase resilience", but added that this is "only as good as the weakest chain in it", and globalised chains mean we have to work together.
In response to Nicolas Mackel's question about the role of big tech firms, Mr Mersch said that such companies could replace financial institutions "at any moment". However, they have so far been reluctant to "confront regulators head-on because this would be a very strong attack on the public system".
Regarding the biggest challenge for the financial services industry in 2022, Mr Mersch warned that the current model of public measures (from central banks and governments) supporting banks during the pandemic "cannot continue". These measures will be phased out at some point, because increased "accommodation [...] is not warranted".
As for the biggest opportunity in 2022, Mr Mersch stated: “As always, the biggest crisis is the biggest opportunity”, as it allows the industry to react and "change [its] business model to focus on most profitable area". He stressed the need to consolide the European banking system, focusing on "business models, cooperation agreements and a higher amount of cross-border activities". However, to achieve all this, the EU should first finalise its banking union.
This interview was followed by a panel moderated by Nicolas Mackel, during which the following industry experts presented their views on what to expect in the new year: Georges Bock, CEO and Founder of InvesTRe; Alberta Brusi, Citi Country Officer at Citibank Europe; Joanna Cound, Managing Director of BlackRock Global Public Policy Group; Yves Nosbusch, member of the Executive Committee and Chief Economist at BGL BNP Paribas.
Interactive polls and a Q&A session with the experts concluded this virtual event.