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.

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.

Long-Term Financing – a stable road towards securing economic growth

At the 2017 Frankfurt Finance Summit, titled Europe Reloaded – Challenges for the Financial Sector, the transformation of long-term financing will be explored in the third panel discussion. Long-term financing is a crucial linkage between the financial and real economy, ensuring growth and stability. Furthermore, long-term financing plays an important role in society, facilitating the funds needed to undertake large infrastructure projects. Providing financing is one of banks’ natural functions. Regulatory requirements following the financial crisis have restricted banks’ ability, and to some extent, willingness to lend. Banks are increasingly unable to meet the rising demand for credit, which has led to non-bank actors becoming providers of long-term capital. However, these are not subject to the same regulations as banks, which creates new risks to financial stability.

Fueling growth and innovation

Long-term financing is a key factor for ensuring sustainable growth in the real economy. As companies expand and invest in new technology, financing is critical. Providing credit to businesses facilitates investment in expansion, new equipment and technology, R&D and personnel. This investment fuels real economic growth and helps European businesses remain competitive in the global arena. Long-term financing also helps banks and businesses look towards the future and increases stability. It allows banks to plan for the long term and to organize their liquidity management, which means they can reduce their vulnerability to short-term changes in capital markets and level out fluctuations in interest rates.

A bridge to the future

Much like a business’s financing requirements for investing in new technology and equipment, governments at every level require long-term financing for large infrastructure projects. Germany’s Ministry of Transport estimates that an investment of 7.2 billion Euros will be needed each year to maintain just the federal republic’s roads, railways and waterways. An expanding digital infrastructure challenges municipalities – in today’s digital economy, subpar connectivity is not an option.

The transition away from fossil fuels and atomic energy towards renewable sources of energy requires an enormous long term investment. In 2016, Germany spent 25 billion Euros on renewable energy. A byproduct of this investment has been the creation of hundreds of thousands of jobs, besides the obvious sustainable sources of energy to power its cities and industry. A growing economy demands a strong infrastructure, which is one factor that contributes to Germany’s attractiveness as a business location. Long-term investment in these infrastructure projects protects an economy’s future capacity for growth.

Finding the delicate regulatory balance

After the financial crisis, regulations have introduced much needed safeguards in the banking sector, but some argue that the demands of Basel III and Solvency II serve to disincentivize banks from long-term lending activities. Since margins are lower in long-term lending, incentives for carrying this risk on their balances sheets are very low. The European Commission addressed this issue in its 2013 Green Paper, encouraging other financial intermediaries to participate in long-term financing.

However, this is not a perfect scenario because these nontraditional intermediaries are not subject to the same regulations as banks. This creates an unlevel playing field and creates new risks for the economy. It is difficult to evaluate the health of the shadow banking sector. Stabilizing the banking sector through regulation will not augment overall stability if less regulated actors create new risks. The challenge facing regulators, governments and the financial sector is to find a balance that allows the free flow of credit into the economy while protecting tax payers from potential bail out scenarios.

At the 2017 Frankfurt Finance Summit, Jens Tolckmitt, CEO of the Association of German Pfandbrief Banks, will chair the panel The Transformation of Long-Term Financing, exploring how the financial sector, regulators and governments can address these challenges on the horizon. Joining Tolckmitt on the panel will be Wolfgang Kirsch, CEO DZ Bank, Michael Rüdiger, CEO DekaBank, and Roland Boekhout, Chairman of the Management Board, ING-DiBa. More information about the Frankfurt Finance Summit on April 26, 2017 can be found here.

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.