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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).

CFS Index rises significantly

CFS Index: Revenues and earnings of services providers increase substantially / Investments by financial institutions reach a historic high since the survey began in 2007

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises significantly in the final quarter of 2016. It climbs 3.7 points to 114.3 points, reaching its highest level for almost two years. The rise can primarily be attributed to a very positive trend in the revenues and earnings of the service providers in the Financial Centre Germany. The only time these levels have been surpassed is when the surveys were first conducted in 2007. The financial institutions are also reporting a solid rise in revenues alongside steady earnings. Investments by the financial industry are noticeably higher too, reaching exceptionally high levels rarely seen in past surveys. Despite this positive development, the financial institutions are sticking to their plans to cut jobs, though these have been moderated slightly. The service providers, on the other hand, continue to increase their employee numbers, again at a slightly slower rate.

“Numerous banks currently find themselves in a phase of transformation, which is leading to considerable investment requirements, especially in the area of IT. The service providers, in particular, are benefitting from this development,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

Financial industry rates the future international importance of the Financial Centre Germany extremely positively

Following the Brexit vote last year, the rating of the future international importance of the Financial Centre Germany reached a historic high of 136.8 points, then declined slightly in the third quarter, and now rises again by 2.7 points to 131.0 points.

Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasized, “The efforts for the Frankfurt financial center are bearing fruit. Especially the positive results with regard to the international importance of the financial center show that Frankfurt is well positioned and has all the opportunities to gain further importance in this field as well.”

Financial industry revenues, earnings and investments are on the rise

The surveyed financial institutions and service providers rapidly increase their revenues/business volume in the final quarter of 2016. The corresponding sub-index for the financial institutions rises by 3.4 points to 113.0 points. However, the service providers record the sharpest increase of 11.3 points to 130.6 points. The only time this level has been exceeded was when the CFS Index surveys were first conducted in 2007. Expectations for the current quarter are positive among both groups, though slightly more modest than the current levels.

Earnings among the service providers develop particularly positively in the fourth quarter of 2016 and clearly surpass expectations from the previous quarter. The corresponding sub-index for the service providers climbs 8.1 points to reach 123.4 points. By contrast, the financial institutions record a small increase of 0.5 points to remain at the low level of 104.5 points, with no change anticipated in the current quarter. The service providers expect their hugely positive earnings trend from the end of 2016 to level off slightly in the current quarter.

The sub-index for investment volume in product and process innovations rises considerably for both groups, contrary to their expectations in the previous quarter. For the financial institutions this sub-index rises by 6.0 points to 116.1 points, thus reaching a historic high since the surveys began in 2007. For the service providers this value climbs 5.8 points to 117.9 points. Similarly, this level has only been exceeded in the years 2007 and 2014. Both groups are expecting the growth rate to level off just slightly in the current quarter.

Fewer job cuts at financial institutions – Slightly slower job growth among service providers

The huge job cuts recorded by the financial institutions in the third quarter have levelled off somewhat, though employee numbers continue to fall in the fourth quarter. The corresponding sub-index for the financial institutions rises by 4.4 points to 90.4 points. The financial institutions are expecting to make further job cuts in the current quarter. By contrast, the jobs situation among the service providers remains positive, though the rate of job creation is slightly lower. The corresponding sub-index edges down 3.3 points to 113.6 points. The service providers are even more optimistic for the current quarter.

 

FinTechGermany Award

CFS Survey: the issue of cyber security must be on every financial industry agenda

The issue of cyber security is of central importance. Germany’s financial industry is in firm agreement on this point, attributing it a significance of high (20%) to very high (75%). This is shown by a current survey of financial institutions and service providers in the Financial Centre Germany conducted by the Center for Financial Studies. However, the industry is also largely in agreement (78%) that the issue is not being sufficiently addressed at the moment.

Most of the financial industry only expecting some measure of support from FinTechs

Only 8% of the survey participants expect significant support from FinTechs in the area of cyber security. Half of them (51%) believe their company will receive at least some measure of support. On the other hand, 29% are anticipating little support from FinTechs, and 7% none at all “The issue of cyber security is a key topic for the future, and in fact it is tailor made for young technology companies. I therefore expect we will soon see more start-ups in this area,” Professor Volker Brühl, Managing Director of the Center for Financial Studies, interprets the results.

Cyber security can become a competitive factor in the future – Establishing European data centres is seen as important to crucial

The large majority of the financial institutions (86%) is in agreement that the issue of data security can become a competitive factor for financial service providers. Only 12% do not believe this is a relevant point. Since a large amount of data from European users is stored by social networks in the US, the necessity of providing data centres for critical data in Europe is under discussion. The majority of the financial industry (59%) believes it is important to establish such data centres, while 26% regard this as crucial. On the other hand, 12% see little relevance in where data centres are located.

“The study demonstrates how important a world-class data infrastructure is for today’s financial sector. The Financial Centre Frankfurt sets the bar pretty high with dozens of data centres and the DE-CIX internet exchange. More than half of the German data centres are located in Frankfurt and the surrounding region. Our status as the Data Capital of Germany is irrefutable and makes us an even more attractive location for FinTechs,” comments Hubertus Väth, Managing Director of Frankfurt Main Finance e.V.

Bitcoins not expected to gain in importance as a payment method in light of data security concerns

Bitcoins are supposed to be particularly suited to preventing hacker attacks in payment transactions. However, the majority of the financial industry (73%) does not expect bitcoins to gain in importance as a payment method in light of such concerns.

CFS Index

CFS Index rates future international importance of the Financial Centre Frankfurt very positively

Significant job cuts at financial institutions – Significant job growth at service providers

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, rises by 0.3 points to 110.6 points in the third quarter of 2016. Though the value remains almost unchanged, it comes as a result of sharply contrasting developments of employee numbers at the financial institutions and the service providers. While the measure of employee numbers at the financial institutions is at a historic low since the Index surveys began in 2007, the service providers are stepping up hiring. Aside from this, the financial industry as a whole is recording growth in revenues and earnings. The financial institutions in particular, after considerable declines in earnings in the first half of the year, now report a clear increase that surpasses expectations. The growth in investment volume declines slightly, but remains at a solid level.

“The figures reflect structural changes in the banking industry’s mode of production, particularly with regard to rising capital intensity and falling employee numbers. Conversely, employee numbers at the external service providers are on the rise, partly due to the trend toward digitalization,” Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

Financial industry rates the future international importance of the Financial Centre Germany very positively

Following the Brexit vote, the rating of the future international importance of the Financial Centre Germany had reached a historic high of 136.8 points in the second quarter. This value remains at an above-average level of 128.3 points in the third quarter, despite falling by 8.5 points. Dr. Lutz Raettig, President of Frankfurt Main Finance e.V. emphasized, “The results of the study show that there is still great trust in Frankfurt’s capabilities as a leading Financial Centre. Our function as a bridge between London and the EU and our constructive handling of Brexit will strengthen Frankfurt as the most important Financial Centre in the Eurozone.”

Job cuts hit financial institutions more strongly than expected, and further cutbacks in personnel are anticipated

The extent of job cuts at the surveyed financial institutions turned out to be even larger than expected in the last quarter. Previously the number of employees had remained stable at a neutral level. Now the employee numbers sub-index for the financial institutions falls by -13.7 points to a historic low – since the start of the survey in 2007 – of 86.0 points, and the financial institutions are expecting the situation to degrade further still in the current quarter. By contrast, employee numbers at the service providers are developing even more positively than expected. The corresponding sub-index improves significantly on the previous quarter, rising 11.8 points to 116.9 points. The service providers are even more optimistic regarding the fourth quarter.

Revenue growth for the financial institutions

The growth in revenues/business volume among the surveyed financial institutions turns out to be slightly higher in the third quarter of 2016 than was expected in the previous quarter. The corresponding sub-index rises by 2.5 points to 109.6 points. As expected, the service providers also maintain their high level of revenues, slipping just -1.0 points to 119.7 points, and they are anticipating increased revenue growth in the current quarter.

Financial institutions stop decline in earnings – Financial industry takes a positive view of the current quarter

In terms of earnings, both groups report growth in the third quarter. The financial institutions in particular, after considerable declines in earnings in the first half of the year, now report a clear increase that surpasses expectations. The corresponding sub-index for the financial institutions rises by 7.0 points to 103.9 points; the service providers’ sub-index climbs 2.2 points to 115.3 points. Both groups have a positive outlook for the current quarter.

The growth in investment volume in product and process innovations declines slightly, but remains at a solid level. For the financial institutions, this sub-index falls by -2.2 points to 110.1 points, contrary to expectations. The service providers’ sub-index remains stable, slipping just -0.4 points to 112.2 points. As a result, the two groups are still at an almost equal level, with neither anticipating any major change in the current quarter.