Over a decade on from the 2008 financial crisis, how secure is the global financial system today?
JEAN-CHRISTOPHE DURAND: A number of major regulatory changes have been implemented by regulators worldwide in order to improve financial risk prevention and mitigation, and strengthen the financial stability of the banking system. While it is impossible to prevent certain banking crises, we do have the ability to mitigate risks.
The financial sector is inherently exposed to external forces such as economic slowdowns, geopolitical events, market turbulence and evolving risks. Fortunately, the regulatory environment evolves in parallel in terms of risk anticipation, assessment and measurement. Stress tests, for example, are becoming increasingly sophisticated in the banking sector.
What are the challenges to implementing banking strategies in the digital era?
DURAND: Implementing a digital strategy is a challenge for all banks, but it is an indispensable one. Banks must forge ahead in the digital realm while never forgetting their core mandates and inherent purposes. Digitalisation is a tool to achieve their mandate in a new environment, manage risks more effectively and serve clients more efficiently. Using digital tools to understand the evolving risk environment, as well as clients’ needs and expectations, will be critical in helping to shape a digital future for the wider economy. As the sector evolves, banks must understand that we need to cater to the digital era, while maintaining traditional service elements such as advisory services and general faceto-face interaction with clients. Are you concerned about the high level of sovereign debt accruing in the region?
DURAND: In the GCC, economic growth is heavily driven by government spending. The government typically executes large capital and development expenditure, and operates large industrial or service corporations, using sovereign borrowing from domestic and international markets to finance these investments. Increasing debt levels are not a concern, as long as there is appropriate fiscal balance management.
The appetite for investors in the region remains strong, as seen in the case of Bahrain’s return to international markets and its other sovereign issuances in 2019. This debt-raising exercise came after a more complicated period of higher budget deficits. This reflects the success of the implementation of the Fiscal Balance Programme. This issuance, which NBB helped lead, was successful in terms of the relative pricing and oversubscription. This showed that investor confidence in the region remains high.
To what extent can sector consolidation provide for higher investment levels in critical IT infrastructure?
DURAND: The cost base of banks to meet their risk-management and regulatory standards is growing continuously, in line with the increased complexity of the risks to which they are exposed. It does not relate purely to IT infrastructure, but included human capital and new technologies. In order to meet these new obligations and regulations, reaching critical mass to sustain this increasing cost base has become a must. Since this is not easily reached purely through organic revenue growth, the logical solution and current trend is consolidation in different forms.
Consolidation will enable banks or banking groups to invest more efficiently, as a result of pooled resources, economies of scale and shared best practices. IT costs are certainly significant in order to keep pace with the industry; many global banks argue that compliance costs have become burdensome because more experts and internal systems need to be in place to fulfil compliance and related risk-management requirements. In effect, adequate compliance and high-quality risk management are now an integral part of the banking sector and are driving investments for the future.