Commercial Banking in Transition

Intermediation has become a major phenomenon. Major companies are acting as intermediaries between businesses and clients. European financial and banking legislation has been built around intermediaries, such as credit institutions or investment firms. It helps to control and supervise the main actors of these industries, in order to protect the markets and the clients. The development of the internet and the blockchain technology has brought changes, with crowdfunding or virtual currencies emerging. They offer individuals the means to avoid professional intermediaries, allowing for more freedom but increasing systemic risk. Reaction of the European Union to such innovations is multiple and pragmatic. The goal of this chapter is to analyze the situation and offer a critical approach to this intense European legislation activity.

This chapter investigates how FinTech applications may deal with competition concerns in the EU legal framework for commercial banks in order to figure out whether and how FinTech may help or worry policymakers. Using the 2007 Sector Inquiry Report as the starting point for this legal analysis, this chapter looks at the following research questions with regard to the EU-based regulatory framework: (i) whether the social role of commercial banks might have impaired the applicability of competition law and, in this context, what role the digital euro might play; (ii) whether FinTech may improve European regulators’ ability to deal with the cost and the drawbacks of two-sided payment platforms; (iii) in the end, whether FinTech could improve the interoperability of national credit registers.

This chapter discusses the rise of crypto-assets in their potential interfaces with the banking business and the challenges posed by prudential regulatory policy. Prudential regulatory policy has after the global financial crisis become more conservative but also dependent on recognised characteristics of mainstream financial assets in order to map financial risks. Existing prudential regulation does not optimally accommodate crypto-instruments and the Basel Committee has adopted risk-averse approaches to banks’ direct exposures. The chapter suggests there are new business opportunities for banks that can be explored, and the engagement between crypto and conventional finance cannot be prevented. In particular, the chapter discusses how crypto-collateralised secured lending can be supported by legal and regulatory clarifications and reform.

Digitalization is a crucial driving force behind the transformation of commercial banking business models. The decline in the number of bank branches serves as a clear indication of the shift from personal on-site service to the digital space. Empirical data from Europe demonstrates a steady disappearance of bank branches, accelerated by the COVID-19 pandemic. Previous research focused on the legal challenges that arise for the active participants in this process (both on the banks’ and the customers’ side). This chapter directs attention to those parties who are affected by the digital revolution in commercial banking but fail to become its active participants. Consequently, we explore how the legal system can accommodate the fundamental right of older individuals to access banking services. Specifically, we argue that lawmakers must address the risks of financial exclusion faced by the elderly.

This paper examines the functioning of Banking Union from its inception to the covid-related economic crisis and explains how Banking Union has changed banking regulation and supervision in the euro area and what this entails for commercial banking. Banking Union, as originally conceived, was to be based on three main pillars. The first pillar is the Single Supervisory Mechanism (SSM), whereby the responsibility for banking supervision is shared between the European Central Bank (ECB) and the national competent authorities working collectively in one system. The second pillar is the Single Resolution Mechanism (SRM), which is responsible for the planning and resolution of cross-border banks directly supervised by the ECB. The third proposed pillar of Banking Union, a common deposit guarantee scheme, was never established.

Problem banks are those facing a crisis. In order for them to stand the negative impact of a crisis, some form of external support is typically needed. The legal framework provides different alternatives to finance a problem bank depending on the stage of the crisis, its seriousness, the size of the bank concerned and the availability of external resources. Among the main sources of financing are: (i) central bank’s emergency liquidity assistance (ELA) and, (ii) deposit guarantee schemes’ (DGSs) support. This chapter analyses these two main options looking at the legal framework in force in the European Union and pointing to the restrictions limiting the deployment of such sources of funding. In so doing, it tries to advance some ideas for reform proposals.

This article provides an overview of the European Union crisis management framework and its need for reform. Institutional Protection Schemes related models, a predominant European banking model with long successful history, need to be better reflected in the overall framework. Its upcoming review should leverage on the ongoing Capital Market Union project, raising synergies with both benefitting from each other. Local resolution regimes should be further harmonized, regulatory barriers removed, and cooperation improved. This would make cross-border investment more attractive in the European Union and (future) candidate countries which are to date not members of the Euro Area, for example in Central, Eastern, and Southeastern Europe. Targeted Capital Market Union regulation could encourage and facilitate the build-up of loss-absorbing capacity exposures of long-term institutional investors.

In recent years, the concept of sustainability has gained growing relevance in European Union (EU) policy discussions and legal/regulatory reforms in the banking field. This chapter analyzes selected key EU policy actions, legal reforms, and proposals for reform with an impact on the commercial banks’ sustainability reporting duties and on their obligations to take stock of sustainability risks and impacts, with a focus on the following questions: Are these policy actions and reforms effective in fostering sustainability? Do they mitigate agency problems between commercial banks and stakeholders affected by or with an interest in sustainability? To what extent are they leading to a redefinition of the corporate objective of commercial banks and of the duties of their directors?

The tsunami of sustainable transition, at the global and the EU level, has not spared the banking sector and commercial banking found itself in the whirlwind of change, which has historically been a stranger to incorporating concerns that are not purely financial. As with other public and private organizations, the progress in terms of sustainable conduct depended to a large extent on individual effort and drive of decision-makers in an individual organization, until regulation changed the rules of the game for the sector at large. The present chapter serves as an empirical account of the challenges of the NLB Group, as the most influential commercial bank in the geographical area of Balkans, in transitioning its business model to align with United Nations Sustainable Development Goals, as well as a tool for a critical assessment of the quality of the EU legal framework. By giving an informed account of the experience of a universal bank, operating in a geographical niche with fragmented smaller markets in South-Eastern European region, with limited attention from large, global banks, that strategically embarked on a path of a holistic sustainable transformation, the present chapter provides a deeper insight into the challenges that arise with such a transformation, especially in the case of divergent legislative frameworks faced by a bank group.

The CMA 2017 Order laid down the foundation of Open Banking in the UK. The Order mandated nine incumbent banks (CMA9) to develop a secure channel based on common and open technical standards for sharing their customer transaction data with competitors. Although aimed at removing the adverse effects on competition in the UK retail banking sector, the CMA 2017 Order also promoted cooperation. This chapter discusses the phenomenon of co-opetition—a combination of competition and cooperation—that is behind the success of Open Banking in the UK. The case of co-opetition is of particular interest in light of ongoing transition to Open Finance, and the need for balancing the measures supporting competition, innovation, and consumer control over their data in the financial sector and beyond.

Commercial banks profit by taking excessive risks with highly volatile financial assets, which contributed to the Global Financial Crisis (GFC). Financial Technology (FinTech) emerged as a response to the GFC, offering alternative financial intermediaries that traditional firms failed to provide. FinTech has made crowdfunding, peer-to-peer lending, payments, money exchanges, and virtual currencies like cryptocurrencies accessible. The COVID-19 pandemic showed that the crypto-market can be unpredictable, leading consumers to take risks. Financial institutions are offering crypto-derivatives and engaging with crypto-assets, which have proven to be volatile and detrimental to unsophisticated investors. Crypto-assets operate in non-territorial legal jurisdictions exempting them from regulations. The Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA) have taken measures to protect retail consumers from crypto-assets risks. Given their potential as an asset class and growing market participation, this chapter examines the ways in which the UK financial sector can monitor its risk exposure to emerging crypto-assets. It also proposes a crypto-market regulatory agency that supports retail investors and scheme-level regulation and self-regulation to reduce risks.

When a bank fails, the relevant authorities may have to place the firm into a resolution procedure to ensure it fails in an orderly way. Given the cross-border nature of banking operations, it may be necessary for the authority to obtain “recognition” of its actions by authorities in other jurisdictions. This chapter provides an in-depth overview of the UK’s statutory recognition regime of foreign resolution actions: why it is important; when recognition will be granted or refused; and the formalities and practicalities of the recognition process.

Climate-related financial risks constitute a significant and distinct challenge for the financial services sector and macro-economy. As such, these risks require responsive action across international organisations, Government, regulatory authorities and central banks. This chapter explores the development of the legal framework and the central banking policy in the UK between 2015 and 2022.

Fintech has significantly transformed the financial service industry and that is particularly so in China. China has the world’s largest banking sector, but it is heavily regulated, in favor of SOEs and leaves a large number of small-medium-sized enterprises and low-income households under-served or un-served at all. Fintech companies rose to fill this gap. China’s Fintech industry has driven disruption into retail banking in payment, online investment, and online lending, posing a real threat to the Chinese banking system. Chinese commercial banks respond to this challenge with both competition and collaboration. China’s large banks have managed to close the gap with Fintech companies, but small-medium-sized banks are struggling to keep up due to a lack of resources.

China’s banking sector undergoes a fintech-driven transformation using technologies like big data, cloud computing, AI, and blockchain. This shift from offline services to online services brings achievements like online finance, trade finance blockchain platforms, and data governance in banks. However, the introduction of China’s central bank digital currency (DC/EP or e-CNY) has mixed impacts on commercial banks. While enhancing convenience, it poses governance risks, reduces traditional income of commercial banks, weakens branches of commercial banks, and pressures infrastructure. To address challenges and protect consumer rights, banks must follow fundamental rules like the Cybersecurity Law, Data Security Law, and Personal Information Protection Law. Commercial banks should accelerate strategic transformations, strengthen information systems, and shift to online platforms. Fintech innovations expand financial services, improving accessibility, reducing costs, and enhancing efficiency in China’s banking sector.

This article discusses the impact of FinTech companies engaged in banking-like business on the financial market. The operating model of FinTech company’s banking-like business is usually that Internet companies engage in activities like payment, wealth management, making loans through their financial services companies. These financial service companies rely on the strong technical support of Internet technology groups, the group’s large and stable customer base, and complete business chain. FinTech has positive impact on the financial market but also brings potential prudential risks. Because these FinTech giants, while engaged in banking-like businesses and already systemically important, are not as tightly regulated as commercial banks. This article focuses on China’s FinTech market, and discusses how to prevent the systemic risks brought by FinTech companies’ banking-like business from the perspective of prudential regulation. To find effective solutions, this paper will analyze the operation models of FinTech companies’ banking-like business and its potential risks. This paper suggests that the prudential supervision of FinTech’s banking-like businesses can be improved in terms of regulatory sandboxes, authorisation and exit mechanisms, liquidity risk, regulatory arbitrage, and RegTech.

Fintech innovations as well as the Covid-19 pandemic and UN SDGs have made a huge impact on banking businesses and supervision in Korea. Fintechs are replacing the substantial part of traditional commercial banking services, thereby raising questions about the future of commercial banking. With a high level of financial accessibility and well-developed digital payment systems, Korea experiences advanced financial inclusion and efficiency of payment services. In Korea, BigTech companies are now competing with traditional financial companies as BigTechs are making full use of big data under the revised Korean Personal Information Act system to facilitate the processing of personal information. However, there are still ongoing debates on issues of how to deal with the banking industry under the changing digital environment, such as pseudo-banking issue, regulation of BigTechs as financial conglomerates under the Act on the Supervision of Financial Conglomerates (SFCA), virtual asset (mostly crypto-assets) regulation, issue of separation of banking and commerce, and Central Bank Digital Currency (CBDC). During the Covid-19 pandemic, pandemic emergency financing made a huge increase of debt ratio for the individuals and SMEs in Korea. If the Covid-19 pandemic continues and it takes some time to recovery after the pandemic, non-performing loans will be a significant burden for the financial institutions. Even credit crunch may be expected in such a situation. In order to prevent such situation in advance, it is urgent to prepare legal measures before such problem becomes reality. The Korean government gives guidance and plans on Environmental, Social, and Governance (ESG) reporting, disclosure, and business operation. Currently ESG is regulated by self-regulation by the ESG Disclosure Guidance in 2021. However, Korean Financial Supervisory Commission announced its comprehensive plan to change on the Korean corporate disclosure system, which includes the staged mandatory disclosure on ESG report in the coming years.

The contributions included in this co-edited book provide a comprehensive overview of the most critical issues relating to commercial banking and banking institutions. The considerations on both the present and future of banks allow to identify their distinguishing features relative to the functions reserved to them, thereby envisaging their prospective evolution. Over the last 20 years, exogenous shocks and inherent economic transitions have affected the predominant model of capitalism based on economic liberalism redesigning the perimeter of banking intermediation. But banking institutions may be considered sui generis entities that exercise an activity of public interest at least because of their money creation function, and this makes them survive difficulties transforming and adapting themselves.