“Better prepared” – a discussion with actors with Brexit responsibility in the Rhine-Main region

The starting signal was sounded a year ago: the British people decided in a referendum on June 23, 2016 in favour of the United Kingdom leaving the European Union and therefore set a process in motion that can already be described as historic. The consequences are so far-reaching that even accomplished experts can hardly gauge effectively how the interaction between the UK and the countries in the EU will change. Only one thing is certain: much of what has been considered certain up to now will be put to the test.

That also applies to the question as to where the financial centre of the European Union will in future be located. The place to be has been London up to now. The race for a successor has already started some time ago and the competition is tough: Amsterdam, Brussels, Dublin, Frankfurt, Luxembourg, Paris and Warsaw are all doing their best – each city in its own way – to become the hotspot of the international finance industry.

Long before the UK made its decision, Frankfurt made initial preparations: to have a voice and be articulate, to provide interested parties with considered answers, to seek dialogue – that is a fair description of what representatives from the Hesse state government and the Hessen Agentur /Hessen Trade & Invest as well as from Frankfurt Rhein Main and Frankfurt Main Finance have wanted to achieve from the outset. With success, as the round table discussion with their representatives shows: those taking part comprised Wolf-Dieter Adlhoch, Head of the Brexit Office in the Wiesbaden State Chancellery, Dr. Rainer Waldschmidt, Managing Director of Hessen Agentur/Hessen Trade & Invest, Eric Menges, Managing Director of Frankfurt Rhein Main GmbH, and Hubertus Väth, Managing Director of Frankfurt Main Finance.

After a year of intensive discussions about the Brexit: how has Frankfurt positioned itself to score points in the competition among European financial centres?

Dr. Rainer Waldschmidt: Communication was the key from the very beginning. As early as during the discussions about the referendum, we already started to bring together important representatives from city and state institutions around the table for talks so as to agree at a very early stage about the concerted action we should take. One important point, for example, was that we don’t focus on Frankfurt as a city, but talk about the Rhine-Main region, because many aspects relating to the issues of talent, infrastructure and quality of life gain their relevance from the circumstances and realities within this larger region.

Eric Menges: It helped us considerably that we had already programmed a complete website before the Brexit decision, which we were able to set up live on the morning the results were announced. That involved a certain risk: the effort might well have been in vain. But it meant we had betted on the right horse, even though we would have preferred the vote to go a different way. There was a massive interest in receiving up-to-date information from this point onwards, as you can imagine. Our swift action received a great deal of positive feedback, especially in the social media. The nicest comment was to the effect that here’s a region that seems better prepared than the rest of England. We allowed ourselves a wry smile on reading that.

Hubertus Väth: Alongside the website, there was also a Twitter and a LinkedIn campaign with a simple, clear-cut message: welcome. As early as 6.20 in the morning, the media were already on the phone and wanted to know whether, and in what way, Frankfurt was prepared. Since then, there have been around 500 inquiries from journalists from over 40 countries. Even now, no week goes by without two to three inquiries coming in.

What are the central messages? What do Frankfurt and the region have to offer?

Wolf-Dieter Adlhoch: There are undoubtedly a lot of hard facts that speak in favour of the Rhine-Main region. Already today we are one of the most important financial centres worldwide. All the major German banks and over 150 foreign banks are present in and around Frankfurt. The most important regulatory authorities, and first and foremost the ECB, are resident here. Another merit is that the German economy is strong and robust, and – more important than ever in times like these – we enjoy a high degree of political stability. The taxes in Germany are not as high as sometimes assumed; 30 percent on average for companies, that makes us competitive. Our labour law is flexible, fair and above all efficient. As far as infrastructure is concerned, our Frankfurt Airport makes us unbeatable …

Menges: I always like to point out that it’s as close as London’s City Airport and as efficient as Heathrow.

Adlhoch: It’s important to us, however, that we don’t just beat our own drum, but that we present objective arguments.

Väth: Three messages have been clearly heard: Europe still needs the international standing of the financial centre of London, which is why we don’t want to harm London as a financial location. We want to build bridges and not tear them down. And we want to work together effectively in future as well.
Menges: Yes, that’s true: we aren’t conducting any superficial advertising campaign, as other financial centres are indeed doing. We are talking with decision-makers in the companies. And many, very concrete questions have emerged that we didn’t at first have in such clear focus. One example: international schools. You can imagine that’s an important issue for employees who are to come to Frankfurt in future with their families. So we brought all the international schools in the region – more than 30 altogether in and around Frankfurt – together around a table and discussed with them whether they are ready in their structure or in their capacity planning to accommodate a large influx of new pupils. The answer is yes. The diversity of schooling options available is also impressive. Armed with such information, we then go back to our discussion partners and can usually answer their questions in all the necessary detail.

Waldschmidt: Available office space is also a topic that comes up again and again in discussions. That’s why we have surveyed the availability and quality of sites together with the local real estate brokers. Specifically: we have 750,000 square metres of vacant office space at the necessary quality level in the preferred inner-city area. Moreover, project development plans are showing a further increase in these A-grade premises. Consequently, we can take up all the people that serious forecasts suggest for the first wave of immigration caused by the Brexit. When we talk about such changes, things don’t happen overnight. Instead, we assume that three waves will take place, each with different regional effects. The first wave will directly impact the financial centre, and therefore Frankfurt and its immediate surroundings, at the very core. The second wave will involve the relocation of European headquarters, i.e. distribution and back office as well. The radius of impact will expand to take in the belt around Frankfurt. It’s only during the third wave that industry will be affected, and that’s where the whole of Hesse is of interest.

After a year, what are the most significant findings and what should be the focus of attention in future?

Väth: Although we have pole position, the race isn’t over yet. It’s too early to take a breather. Exogenous factors, such as a possible US tax reform, can still change crucial parameters to our disadvantage. We must also point out that the competitors are doing a good job and are achieving some success – for instance in the domain of insurance companies and asset managers. The question of the future of euro clearing will certainly be of great importance – and area where exciting days and weeks lie ahead of us. Here, too, we’ve already done a lot of educational work. But, having said all that, it’s also time to say thank you. Whether BaFin or the Bundesbank, the state government or national government – outstanding work is has been and is being carried out when it matters, and this doesn’t go unnoticed. It has also been remarkable just how many of our members have unselfishly contacted us and asked whether they can do anything for us. Needless to say, we didn’t say no and were able to get a number of things moving. Also noticeable was how actively new members approached us and said that they now understood why we are important and why it makes good sense to participate.

Adlhoch: We take the feedback we receive from the many individual discussions we hold as representatives of state government, of Hessen Agentur, Frankfurt Rhein Main and Frankfurt Main Finance very seriously. What is well received is the confidential dialogue, and that’s why our focus will remain in this area in future. What we will do more intensively is to organise a direct exchange with experts. This region is home not only to the banks and regulators, but also to all those lawyers and consulting companies that are so necessary for the financial industry. We clarify detailed questions about labour law, tax issues and regulatory aspects by mediating contacts and networking experts. One thing we won’t be doing is to promote the location with the help of short-sighted gifts – i.e. allowances, benefits or privileges. We are firmly convinced that as a region we have what we need to make our case effectively to companies and to help them make the right decision in their strategic location. Last but not least, this also applies to the quality of life. We’ve not spoken a lot about that today, but everyone familiar with the Rhine-Main region knows all too well that the spectrum of leisure and cultural activities on offer is really quite impressive.

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New Offer: Banking Business in Germany Seminar

“Banking Business in Germany – Relocating from London to Frankfurt” is the title of an information event that will provide financial services providers with valuable support in the relocation of business units (from London) to the Financial Centre Frankfurt. Well-known speakers, like Dr. Oliver Wagner (Association of Foreign Banks in Germany), Olaf Atja Lemmingson (Frankfurt Economic Development GmbH) and Eric Menges (FrankfurtRheinMain GmbH) will cover a wide range of topics: questions on supervision and regulation are to be addressed as well as employment aspects and general topics such as the housing market and schools. The organizer of the two-day event is Management Circle, whose flyer and website contain further details and dates.

Eschborn for Business

Upwardly Mobile: Eschborn for Business

The newest edition of the magazine Eschborn for Business is now available. The annual, bilingual magazine concentrates on the more than 30,000 employees and over 4,000 companies located in Eschborn, covering a wide range of commercial and economic developments in the city.

Some highlights:

  • “Upwardly Mobile” – cover article discusses the city’s commercial growth, new construction and the drivers behind this.
  • “A once-in-a-lifetime opportunity” – Frankfurt Main Finance Managing Director, Hubertus Väth explains how Brexit will positively impact the Frankfurt Rhein-Main Region and Eschborn.
  • “The most dynamic FinTech Hub” – The Frankfurt Rhein-Main Region is home to a booming FinTech ecosystem. Deutsche Börse, headquartered in Eschborn, is one of the movements biggest supporters.
  • “From London to Eschborn” – South Korean tech giant, LG has moved its European headquarters from London to Eschborn.

Eschborn: top location with high standard of living

Thanks to a combination of relevant business factors, the city of Eschborn, with its population of 21,000, has developed into an international and modern business hub. Ninety-five percent of the over 4,000 local businesses are service providers, primarily in the finance, IT, consultancy, and telecommunication sectors. About 80 high-tech companies have also settled in Eschborn, establishing the city as an important innovation hub in the FrankfurtRhineMain area.

The current edition of the Future Atlas published by the Prognos research institute ranked the Main-Taunus-area, spearheaded by Eschborn and its over 32,000 employees, 15th in its ranking of 402 German cities and administrative districts. Local companies benefit from the convenient infrastructure, the proximity to Frankfurt Airport and ICE train stations, from the business-friendly tax policy and Eschborn’s moderate lease and property prices. The location’s green surroundings, nestled in the foothills of the Taunus Mountains, add to its appealing high quality of life. There are attractive residential areas, committed schools, lots of sports facilities and parks, free-of-charge parking lots, and over 100 different clubs and cultural institutions that offer a wide range of leisure activities. In conclusion, Eschborn is a location that opens up promising perspectives for work and leisure.

Download the 2017 edition of Eschborn for Business!

Financial Centre Report

Building Bridges – Frankfurt and Europe after Brexit. The new Financial Centre Report from Frankfurt Main Finance

The new Financial Centre Report, Building Bridges – Frankfurt and Europe after Brexit, from Frankfurt Main Finance has just been released. Designed as a magazine, the Main Metropolis is presented from varying perspectives and demonstrates the city’s strengths and the distinct characteristics that set it apart. The first section of the report is devoted to the many facets of the Financial Centre Frankfurt. The second part of the report, Insights, analyzes economic issues and takes a critical look at the opportunities for the Financial Centre following Brexit.

In the forward from Hessian Minister for Economic Affairs, Tarek Al-Wazir, the minister recalls the rise of Frankfurt as the most important Financial Centre in Continental Europe. He points to the multitude of challenges the financial industry faces today. Reflecting on the demands on the industry to re-invent and re-establish itself through digitization. Helping to tackle these challenges is the thriving FinTech scene in the Rhine-Main region.

Another current challenge is coping with the reorientation of the European financial sector following and finding future oriented solutions for this. The title of the Financial Centre Report, Building Bridges, is born from this challenge. The report explains how Frankfurt and the Rhine-Main region are helping to future-proof the European Financial Sector and continue ensuring it can efficiently support the real economy.

The publication from Frankfurt Main Finance casts a spotlight on the Financial Centre Frankfurt and introduces insights that work together to paint an impressive and coherent picture. After the lighter, more personal look at the Main Metropolis in the first section, the following half delves into a fact-based analysis of the Financial Centre Frankfurt and the region. Readers will appreciate the careful exploration of the day’s pressing topics: What does Brexit mean for Frankfurt? The current and future relationship between the real economy and banks. What is the state of long-term financing and how will the German economy be affected by Brexit?

Frankfurt Finance Summit 2017 – Europe Reloaded

Since 2011, prominent actors from the national and international financial world have gathered for the Frankfurt Finance Summit. Under the motto Europe Reloaded – Challenges for the Financial Sector, decision-makers from central banks, stock exchanges, supervisory authorities, banks, insurance companies, politics, business and academia met on 26 April 2017, in the Financial Centre Frankfurt to discuss current issues faced by the European economy, regulators and financial markets. This year concentrated on three key areas challenging the financial sector: Europe after Brexit, Cyber Security and Innovation, and the Transformation of Long-term Financing.

Dr. Lutz Raettig, President of Frankfurt Main Finance, opened the Frankfurt Finance Summit by celebrating the diversity of the attendees and speakers, ranging from several countries and continents and a broad range of backgrounds in the financial services industry. He explained that this year “change is the story – change in all directions,” and that fundamental changes due to Brexit and banking regulation will follow the industry for years to come. Raettig closed by thanking the sponsors of the Frankfurt Finance Summit for their generous support. Sponsors this year included Deutsche Bank, McKinsey & Company, Deutsche Börse Group, DZ Bank, ING-DiBa, the Association of German Pfandbrief Banks, and Frankfurt Economic Development GmbH.

The time for diplomacy

Baroness Catherine Ashton with Prof. Dr. Uwe Stegemann

The day’s first topic, Europe after Brexit, began with a keynote from Baroness Catherine Ashton, Former First Vice President of the European Commission and former High Representative of the EU for Foreign Affairs and Security Policy. The veteran diplomat reflected on her experiences in complex negotiations ranging from EU trade deals to the chairing the P5+1 leading to the Geneva interim agreement on the Iranian nuclear program in 2013. Lady Ashton’s insights into the intricacies and keys to success for these sorts of arbitrations resonated with the representatives of the financial sector whose organizations will certainly be touched by the forthcoming Brexit negotiations. Lady Ashton emphasized that diplomatic solutions are not always just found in negotiations, but rely on coalition building to provide a comprehensive approach to resolving complex problems. She closed by stating, and perhaps reminding the audience of the European Project’s many successes, that “diplomacy is soft power at its best. And that’s what Europe does best, soft power.”

 

Banks look for clarity in Brexit negotiations

Michael Theurer, Jens Wilhelm, Sylvie Matherat, Prof. Dr. Uwe Stegemann

Chaired by Prof. Dr. Uwe Stegemann (Senior Partner, McKinsey & Company), the following panel discussion on Europe after Brexit featured Sylvie Matherat (Chief Regulatory Officer and Member of the Management Board, Deutsche Bank AG), Michael Theurer (Member of European Parliament), and Jens Wilhelm (Member of the Executive Committee, Deutsches Aktieninstitut e.V., and Member of the Executive Board, Union Asset Management Holding AG). Diving right into the topic, Sylvie Matherat explained the potential consequences for banks, particularly the difficulties caused by the uncertainty surrounding the Brexit negotiations. Matherat explained that the large banks will prepare for the worst and hope for the best. “For front office people, if you want to deal with an EU client, you need to be based in the EU,” Matherat said. “Does it mean I have to move all the front office people to Germany or not? We’re speaking of 2,000 people.” The situation for banks is quite difficult, as two years is not very much time to move entire operations. Looking past Brexit into the future, Michael Theurer emphasized that it is important to continue with European integration and strengthening the European Union.

Cybersecurity threats a growing concern for all of society

Eugene Kaspersky, CEO of Kaspersky Lab, delivered a keynote on Cybersecurity and Innovation. He explained the scope of today’s cyber risks, detailing specific threats to four critical sectors: power, transportation, telecoms and financial services. Kaspersky Lab collects 300,000 unique malicious objects every day. The cybersecurity pioneer explained that cybercrime costs the world between 375 and 465 billion euros per year, which is almost twice the GDP of Hesse. Kaspersky advised that IT systems need to be safe, secure and immune by design. Looking forward he stated that there is “a lot of work. Starting from the government regulation, education, technologies, implementation and international cooperation.”

Dr. Andreas Dombret

For the first panel on cybersecurity, moderated by international economist Cornelia Meyer, Felix Hufeld (President of the Federal Financial Supervisory Authority (BaFin)) joined Dr. Andreas Dombret (Member of the Executive Board, Deutsche Bundesbank). The panelists discussed regulatory efforts to confront cybersecurity risks. Felix Hufeld detailed BaFin’s newest set of guidelines, BAIT (Bank Supervision Requirements for IT). He explained that “from an individual bank’s point of view managing cybersecurity is one component of what you could consider operational risk. […] Logically speaking, it’s an application of risk management procedures, strategies, governance structures, and what have you, of course applied to a uniquely new challenge.” Dr. Andreas Dombret emphasized the importance international cooperation and for organizations to learn from each other. When asked, what regulators expect from financial institutions, he stated, “if we all agree that cyber-risks are here to stay, the financial institutions we supervise should treat these risks with the same deliberation and the same whole heartedness, so to say, as all the traditional banking risks.”

Education key to creating a safer IT environment

Daniel Domscheit-Berg

Offering another view of cybersecurity, Daniel Domscheit-Berg (Author and Former Spokesperson, WikiLeaks) joined Eugene Kaspersky on the panel to discuss cybercrime and how organizations can best defend against these risks. Domscheit-Berg discussed the human factor often being the biggest weakness for an organization. He explained that “you should make sure that whoever works for you, in whatever capacity, that they not only have good rules, but they also have a good understanding of why these rules matter and why they need to stick to these rules. And if you explain that very well, […] then I think from an educational perspective you’re getting towards a more secure environment.” Kaspersky reinforced the human factor in cybersecurity, discussing the difficulties in fighting cyber criminals. He described this human versus human fight as a chess match and underscored the arduous task of predicting future risks and criminals next moves.

Banks’ critical link to the real economy

Wolgang Kirsch

The Summit’s final panel featured the heavyweights of the Financial Centre Frankfurt in a discussion on the transformation of long-term financing and the future role of banks. Panel moderator, Jens Tolckmitt (CEO, Associaton of German Pfandbrief Banks), was joined by Wolfgang Kirsch (CEO, DZ BANK AG), Michael Rüdiger (CEO, DekaBank Deutsche Girozentrale), and Roland Boekhout (Chairman of the Management Board, ING-DiBa AG). Long-term financing is one of the critical functions banks play in society and a classical area where banks serve the real economy. However, since the financial crisis, the changing regulatory environment has made it difficult for banks to gauge their appetite for taking on long-term risk. The panelists agreed that there is a mismatch in incentives from regulators for banks to provide long-term financing. To meet the credit demand in the market, new actors have become active in this field. Roland Boekhout suggested FinTechs and peer-to-peer financing platforms entering this arena are not likely to gain traction, primarily sticking to short-term products. Boekhout underscored the added value of banks expertise in the credit business and structuring the facility on a risk.

The seventh Frankfurt Finance Summit came to an end with the traditional closing remarks from Wolfgang Hartmann (Chairman of the Executive Committee of the Frankfurt Institute for Risk Management and Regulation (FIRM)). Hartmann reiterated the challenges facing the European financial sector, especially those from Brexit. Additionally, he announced that this would be his final Frankfurt Finance Summit as the Chairman of FIRM.

CFS Index

CFS Index reveals contrasting tendencies

Financial institutions limit job cuts and increase earnings growth – Service providers report slower growth in revenues, earnings and investments

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, falls by just 0.7 points to 113.6 points. The resulting persistently high level is based on contrasting tendencies. The financial institutions report unexpectedly high earnings growth and make fewer job cuts. The service providers, on the other hand, report a significant decline in revenue and earnings growth, though these levels still remain high. The investment volume of both groups remains positive, though it is not able to maintain previous peak levels.

“The stabilized economic development of the financial institutions is particularly expressed by a gradual rise in earnings expectations, coupled with a strong increase in their earnings generated in the first quarter. This is good news, as it can create the right conditions for urgently needed capital growth among the banks and thus improve financial stability,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

Rating of the future international importance of the Financial Centre Germany reaches second-highest level of all time

Having already been rated extremely positively since the Brexit vote, in the second quarter of 2017 the future international importance of the Financial Centre Germany almost reaches its historic high of 136.8 points from last year. The corresponding value rises by 4.0 points to 135 points.

Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasizes: “The survey clearly shows that the growing trend is intact: the financial sector sees an increasing importance of the Financial Centre Frankfurt. This is a satisfying result and the outcome of increased cooperation between all relevant actors in the financial centre.”

Service providers record significant decline in revenue growth, yet maintain a solid, high level

Growth in revenues/business volume in the financial industry declines slightly, but remains at a solid, high level. Among the financial institutions this sub-index rises by just 0.9 points to 113.9 points. The service providers record a significant decline of 4.0 points, yet remain at a very good level of 126.6 points. Both groups anticipate a further decline in growth in the current quarter.

Unexpectedly positive earnings performance among financial institutions – By contrast, service providers report a considerable decline

The surveyed financial institutions are able to significantly boost their earnings following the weak performance in the previous quarters. The corresponding sub-index rises unexpectedly by 8.0 points to 112.5 points. A year ago the sub-index was as low as 97.9 points. The service providers, on the other hand, report a decline in earnings growth of 5.5 points, though the sub-index remains at a high level of 117.9 points. Both groups, particularly the financial institutions, anticipate a decline in the current quarter.

Financial institutions clearly curtail job cuts

The trend since the start of the year among financial institutions to limit job cuts remains intact. The corresponding employee numbers sub-index shows a significant rise of 7.2 points to 97.6 points, though it still remains under the neutral threshold of 100 points. As for the current quarter, the financial institutions expect job cuts to rise slightly again. The service providers, on the other hand, continue to hire employees at almost the same rate. The corresponding sub-index falls by just 0.1 points to 113.6 points. The service providers are more optimistic regarding the current quarter.

Investment volume remains very positive, but cannot maintain previous highs

Despite a decline in growth, the investment volume in product and process innovations among both groups remains at a strong level. The corresponding sub-index for the financial institutions falls by 2.6 points to 113.5 points. The service providers report a more significant decline of 6.1 points to 111.8 points. Both groups anticipate further declines in the current quarter.

About the Center for Financial Studies

The Center for Financial Studies (CFS) conducts independent and internationally-oriented research in important areas of Financial and Monetary Economics, ranging from Monetary Policy and Financial Stability, Household Finance and Retail Banking to Corporate Finance and Financial Markets. CFS is also a contributor to policy debates and policy analyses, building upon relevant findings in its research areas. In providing a platform for research and policy advice, CFS relies on its international network among academics, the financial industry and central banks in Europe and beyond.

About the CFS Index

The CFS Index is compiled from a comprehensive quarterly survey among 400 decision makers in the German financial sector (return about 50% on average). The survey contains four questions about the participant’s view on different business parameters (business volume, earnings, employment level and investment volume in product and process innovations). The answers to the questions may be given as “positive”, “neutral”, or “negative” and a response is requested for the previous and the current quarter. Due to construction, the maximum index value is 150, the minimum index value is 50; a value of 100 signalizes a neutral business sentiment. The survey-panel consists of enterprises and institutions of the financial industry and selected companies that profit from the financial sector.

Cybersecurity

Why Cybersecurity is a Concern for Financial Regulators

In March 2017, the German Federal Financial Supervisory Authority (BaFin) held their third conference covering IT supervision for banks. At the conference in Bonn, BaFin President Felix Hufeld told the more than 400 attendees that cyber-risks are one of the most substantial facing the German financial sector. Cybersecurity risks are indeed immense, as banks are susceptible to theft, data breaches and denial of service attacks. In a recent study from KPMG, 38% of responding German companies reported to having been a victim of cyber-crime in the past two years. One in twenty reported losses of more than 1 million euros due to cyber-attacks.

The monetary costs for businesses are obvious. However, for the financial sector the costs can be farther reaching. Since financial institutions, public and private, play a critical economic function, the fallout from a cyberattack on an institution can trickle down into the rest of the economy and society. For this reason, cybersecurity has become a significant concern for financial regulators around the world. At the 2017 Frankfurt Finance Summit, Felix Hufeld will join Dr. Andreas Dombret, Executive Board Member of the Deutsche Bundesbank, for a panel discussion on the challenges of cybersecurity and innovation.

At the March conference on IT security, BaFin introduced new additions that will be made to the Minimum Requirements for Risk Management (MaRisk) concerning IT Security. The German regulator worked in cooperation with Deutsche Bundesbank on the forthcoming guidelines, called Bank Supervision Requirements for IT (BAIT), which are expected for the middle of 2017. BAIT aims to help banks understand the supervisory expectations regarding cybersecurity strategy. The guidelines will place new pressure on management boards to assume responsibility for strategically managing cyber-risks. At an event in 2016, Dr. Andreas Dombret referenced these responsibilities, explaining, “We therefore demand that banks clarify what is at stake and how the risks are supposed to be governed. This is called a cyber strategy, and every bank is required to have a convincing one.”

Not just German regulators are demanding higher cybersecurity standards from the financial sector. The New York State Department of Financial Services (DFS) has outlined new cybersecurity requirements for financial services companies which came into effect in March 2017. Amongst other items, the new regulations establish requirements for formal cybersecurity programs, incident reporting, and data encryption. Additionally, the New York regulators place the ultimate responsibility for cybersecurity with management boards and requires the employment of a Chief Information Security Officer charged with overseeing and implementing the cybersecurity program and enforcing its policies. The USA’s federal regulators are following suit and currently drafting regulations that would place stricter standards on sector-critical firms.

In January 2017, Jens Weidmann, President of the Deutsche Bundesbank, clearly explained that increasing reliance of market infrastructures on digital technologies has made the global financial system even more vulnerable to cyber-risks. Weidmann maintains that “The damage unleashed by successful attacks goes beyond the financial loss incurred. Cyber-attacks can potentially undermine peoples’ trust in the financial system.” This trust is critical to banks and financial services ability to serve their important role in society. Thus, it is understandable that cybersecurity falls within the purview of financial regulators and for them to set clear requirements, just as they would capital requirements, for example. Weidmann concluded by saying, “to avoid jeopardising the positive impact of digital finance, it will be crucial to address these risks and for banks to manage their IT and cyber risks with as much diligence as they do their traditional banking risks.”

These regulatory questions regarding cybersecurity will be addressed at the seventh Frankfurt Finance Summit, titled Europe Reloaded – Challenges for the Financial Sector. Felix Hufeld and Dr. Andreas Dombret will be joined by panel moderator and international economist Cornelia Meyer to discuss the challenges of cybersecurity and innovation.

Brexit Frankfurt Finance Summit

After Brexit, financial centres confronted with a new reality

Just six weeks before the Brexit Referendum, in his keynote at the 2016 Frankfurt Finance Summit, Dr. Wolfgang Schäuble, German Federal Finance Minister, described this as possibly the biggest political decision in a generation. Schäuble stated that “I think both the EU and the UK are better served with Britain remaining,” and later posited that “Great Britain’s relationship with Europe should not be defined by splendid isolation, but by splendid integration.” Last year’s nightmare became this year’s reality. Article was triggered on March 29, 2017, and official negotiations are underway and on the clock. This year’s Summit, titled Europe Reloaded – Challenges for the Financial Sector, will seek to encourage productive dialogue on how Europe can move forward after Brexit.

With the formal declaration by the United Kingdom’s government to withdraw from the European Union, Brexit has now entered a new and decisive phase. Hubertus Väth, Managing Director of Frankfurt Main Finance e.V. states, “The beginning of the exit negotiations between the United Kingdom and the European Union are imminent. The negotiating parties are entering uncharted territory. Of the utmost importance, will be standing fast to the maxim that maintaining stability in the financial system must take precedence over individual interests. Both parties must strike the delicate balance between averting a cliff-edge scenario while still maintaining the recognizable appeal of membership in the EU.”

The United Kingdom’s withdraw from the EU is regrettable. The anticipated loss of rights, including passporting, will create a dramatic shift of banking and financial services out of London. While bad for London, and Europe in general, European financial centres are poised to profit from this exodus. “The Financial Centre Frankfurt is exceptionally situated to assume a position functioning as a bridge for London into the EU,” explains Väth, “As the home of the European Central Bank, the Europe’s insurance supervisory mechanism, Europe’s largest stock exchange and the largest internet hub for data traffic, Frankfurt offers best infrastructure for credit institutions and financial services providers active across Europe. Frankfurt’s TechQuartier and dynamic, growing FinTech ecosystem have been distinguished by the Federal Government with the Financial Centre Frankfurt’s appointment as Germany’s Digital Hub for the finance industry. Therefore, we still estimate that around 10,000 jobs will be relocated to Frankfurt in the coming years.”

These estimates of jobs moving to Frankfurt are not empty estimations. Just last week, Väth reported in the Financial Times that Frankfurt already has more than an indication from three of the five largest US banks, as well as a Swiss, Japanese, Korean and Indian bank that they have either decided to relocate operations to Frankfurt or are in the process of doing so. Clearly, Frankfurt is in the pole position to benefit from Brexit, but certainly not alone amongst European financial centres. Each financial centre is uniquely equipped to accept certain functions and business units. For example, Luxembourg and Dublin are ahead with asset managers. Warsaw’s affordable and well trained talent pool should result in an influx of back office functions. It seems certain that operations will move out of the City of London, but will be fragmented across European financial centres.

However, major questions still linger. What will the new financial centre landscape look like? Will Euro Clearing be forced under ECB jurisdiction? If so, who will win this 500 billion EUR market? Will the European Banking Authority join the other European regulatory functions in Frankfurt? The future of Europe and its financial centres will be the topic of the 2017 Frankfurt Finance Summit’s first keynote and panel discussion.

cybersecurity

Digitalization Presents New Cybersecurity Challenges for Financial Sector

As our economy embraces digitalization and countless connected devices accompany us in our professional and private lives, cybersecurity has become a key challenge, especially for the financial sector. Thus, it is appropriate that a major topic at this year’s Frankfurt Finance Summit, titled Europe Reloaded – Challenges for the Financial Sector, will focus on cybersecurity and innovation. Data breaches and cyberattacks can potentially result in millions in losses and severely damage brands. In February 2016, cyber criminals attempted to steal $951 million from the Bangladesh Bank and succeeded in absconding with $101 million. Beginning in 2015, Kaspersky Labs reported that the Carbanak group had infected computers in more than 100 financial institutions, allowing them to manipulate account balances, transfers and remotely control ATM machines resulting in the theft of up to $1 billion (Kaspersky Labs CEO, Eugene Kaspersky will be delivering a keynote at this year’s Frankfurt Finance Summit). These cyberattacks on organisations and governments are growing rapidly in both complexity and frequency, challenging them to re-evaluate their approach to safeguarding against cybersecurity threats.

Theft of funds are not the only tangible costs of an attack. Data breaches can endanger customer data, trade secrets, industrial equipment and even personnel. Cybersecurity Ventures’ analysts estimate that Cyber Crime cost $3 trillion in 2015 worldwide and expect these costs to rise to $6 trillion by 2021. Considering these massive costs, addressing these threats has become regular discussion in board rooms across the world. The same Cybersecurity Ventures’ analysts report that $120 billion will be spent in 2017 on cybersecurity products and services and expect this spending to exceed $1 trillion cumulatively from 2017 to 2021. Due to increasingly complex attacks and levels of interconnectivity of business processes, just a strong castle wall no longer offers the necessary protection.

Cameron Brown (@AnalyticalCyber), a trusted cyber defense advisor and information security strategist who consults for the risk advisory practice of EY across Germany, Austria and Switzerland. He explains that there is a paradigm shift occurring within corporations as “security incidents and data breaches are literally decimating consumer trust, irreparably damaging brands, and causing stocks to plummet overnight.” Companies who recognize this new reality are making massive investments in Security Operations Centres and Threat Intelligence to enhance early detection and proactively identify vulnerabilities. Brown observes that “boards are increasingly receptive to adopting holistic strategies to secure their informational assets. In-house security teams are being equipped with tools to enable greater visibility across the environment and foster more effective collaboration when responding to security incidents globally.” Per Brown, the risks associated with third party providers are recognized as a significant source of vulnerability. He adds that “organizations seeking to maintain their competitive edge in the market are investing in technology to detect and deflect external threats and developing the resiliency of their people to withstand and eradicate threats that have moved inside the enterprise.”

Cybersecurity is especially relevant for FinTech

Considering the tens of millions of transactions, trades, and sensitive data transferred every day, the cybersecurity challenges for the financial sector are immense. At the same time, digitalization is occurring at an unprecedented pace. Reconciling cybersecurity concerns with new, innovative applications and systems can be an especially formidable undertaking. Utilizing third-party applications and services is a common practice and these integrations can introduce potential vulnerabilities into an environment. These concerns are particularly relevant for FinTech companies whose applications are often connected through banks’ APIs. Brown says, “some players are contentiously baking robust security into their solutions, whilst others are falling short of the mark. The development lifecycle is aggressive, expansive, and highly dynamic.” The senior advisor asserts that many products are ill-equipped to withstand targeted and persistent cyberattacks; and maintains that “innovators and entrepreneurs must reprioritise security to avoid short-sighted pitfalls associated with rushing to market without sufficient product testing and evaluation.”

However, some FinTechs are also contributing to improving cybersecurity, like 2016 Golden Garage winner, WebID Solutions, who facilitates secure online-identification. Brown notes that “ongoing and proactive dialogues between entrepreneurs and regulators are critical for cross-pollinating awareness and engendering understanding of the technologies which underpin FinTech solutions and give rise to security vulnerabilities.” The cybersecurity expert explains that this collaboration also informs the development of measured regulatory frameworks which serve to enhance rather than thwart creativity and resourcefulness. “Open channels of communication can also benefit entrepreneurs by assisting them to forestall issues concerning privacy, consumer protection and the impact of trans-border complexities,” explains Brown. He strongly urges that before going to market, FinTech firms perform thorough risk assessments of their data protection needs, with emphasis on confirming where data resides and charting the course through which their data flows, including third-party facilities.

Staff and business units act as the first line of cybersecurity defence

As corporations invest in technology and human capital to mitigate and minimize potential risks, it is important to communicate with employees on how they can make a difference. Cameron Brown explains that a fundamental hurdle many organisations face is raising security awareness among staff and leadership. “The CIO is the lynchpin who must help the organization to navigate the threat landscape and leverage data movement to maximise revenue. To accomplish this task, CIOs need a multifaceted skillset to ingest operational, legal, regulatory and compliance issues which impact both IT and business environments. CIOs must predict threats and champion the implementation of new risk models.” In organisations, large and small, educating staff on potential dangers they may encounter daily could help prevent costly intrusions. Brown adds that cyber security is a whole-of-business issue which mandates a whole-of-business approach. He emphasises that “security awareness and training initiatives for staff, including exercising business continuity plans, are vital components to empower staff and business units, who are the first line of defence.”

At this year’s Frankfurt Finance Summit, the second panel and keynote by Eugene Kaspersky will focus on Cybersecurity and Innovation. Joining Kaspersky on the panel chaired by international economist Cornelia Meyer will be Felix Hufeld, President of BaFin, Andreas Dombret, Deutsche Bundesbank Executive Board Member, and Daniel Domscheit-Berg, author and former WikiLeaks spokesperson.

 

Center for Financial Studies

Financial Regulation in Europe – just science or also an art?

The fact that financial regulation is a science would hardly be argued by anyone. But looking at financial regulation as an art – this connection is not easy.

The address given by the President of the Federal Financial Supervisory Authority (BaFin), Felix Hufeld, on March 16, focused precisely on the question of whether financial regulation is a science or an art. More precisely, which part of regulatory processes are considered as science and which are considered an art. Hufeld’s address was hosted by the Center for Financial Studies (CFS) at the Financial Centre Frankfurt’s Goethe Universität, whose lecture series is well known for its top-class speakers.

Hufeld described the basic concepts, models, and quantitative methods of regulation as scientific, but, further on in his lecture, he shifted focus to shed light on the parts of regulation that transcend these scientific elements, which Hufeld designated as art. These questions and decisions which cannot be answered by mathematical models, which necessitate consideration between different regulatory objectives, which can also intersect in a tense relationship. “In short: questions that rely primarily on one’s personal judgment,” as Felix Hufeld summarizes. These difficulties are exacerbated by regulation moving towards a context of global development, by the continuous process of Europeanisation, the dynamism of the markets, as well as the fundamental changes brought by digitalisation.

Using four examples, Hufeld dove deeper into this understanding of regulation as an art: financial stability vs. profitability, risk sensitivity vs. procyclicality, principle-based vs. rule-based regulation, and consumer protection vs. credit institutions’ capacity to act. These and other areas of tension require individual, creative and pragmatic decisions from regulators based on principles of stability and continuity, which must be balanced by the tension between contradictory regulatory objectives and dynamic developments. At the end of this process, the goal of regulatory authorities is to realize a sustainable, viable order in financial markets and to avoid the vicious cycle of crisis to regulation to deregulation and back to crisis.

The full text of Felix Hufeld’s lecture can be found here (German).