In an ever-changing financial system, the role of the regulator is increasing, explains Jean Hilgers, Director of the National Bank of Belgium.

When you look at the structure of regulation, it is either the market or the regulator who is ahead of the curve. If it is the market and there are problems, the regulator has to intervene. We have seen this, notably with the 2008 crisis and Basel III. In the same way, regulation should adapt to new technologies and new uses. This is already the case in the EU with MiCA for crypto markets or DORA for operational resilience. As supervisor, we ensure that there are safeguards with prudential supervision. In climate risk, this is more the opposite, as regulators and supervisors have both been in the driver’s seat.

Jean Hilgers

Jean Hilgers

President BFF, Director NBB

Shifting risks

The financial system is extremely regulated, and we are seeing a shift in risks to players other than traditional banks and insurance companies, such as family funds, money market funds, supply chain finance, private equity, etc. However, these structures present certain fragilities. The scope of regulation must evolve and be broader than only focusing on banking institutions and insurance companies.

Bancassurance has reached maturity. Banking and insurance are two very different worlds that do not talk frequently to each other and are not regulated in the same way. For the bank, there is mainly a credit risk on the asset side. As for insurance, the main risk is on the liability side linked to technical provisions. A credit risk is not weighted in the same way in the two sectors. Furthermore, the insurance sector is not integrated at the European level, because social legislation, particularly with regard to health care and pension schemes, is still essentially national. 

Consumer protection

For banks developing an organic ecosystem, the key question is who controls the relationship with the customer: the bank or another operator? Only large banks can develop their own ecosystem. The small ones do not have the necessary resources (deep pockets), profitability and scope to create that. There is therefore a risk that the latter will become less relevant on a stand-alone basis.

Big Tech, who possibly knows the consumer better than anyone else, has formed partnerships with banking institutions in the real world, as well as in the virtual world, such as the metaverse. This idea makes sense and must be regulated, keeping in mind that the rule applies for both the real and virtual worlds: Same Activity, Same Risk, Same Regulation. I would add that consumer protection in the virtual world goes beyond the financial sector. 

No consolidation at European level

Today in 2030, other players, besides the four major banks in Belgium, have been active in asset management, supply chain finance, fintech, etc. They either grew or were absorbed by other players. Within the European Union, consolidations have been taking place domestically, especially in markets where we see overcapacity, such as Germany, Austria and Italy. The other European markets are relatively concentrated and less consolidation is expected.

The prudential framework is not what is currently stopping massive consolidations at the European level, but rather other factors, such as the domestic dimension of many regulations applicable to banks, the lack of a clear business case or the political willingness of larger European countries to see mergers involving their local champions. Banks are first concerned with ensuring sufficient profitability in view of the risk profile before considering further internationalization. Finally, competition regulation also plays an important role in avoiding dominant position abuse.

ESG: harmonization of standards

As far as ESG is concerned, the regulator has played an essential role in setting the reference framework. Institutions must first gather information and data in full transparency. Then they must develop and harmonize methodologies. Finally, some players must specialize in methodologies and related models.

If you lend to an exposed sector, you take a risk and this risk must be calculated. The conditions for granting credit, including pricing, have taken ESG-related values into account. New elements of appreciation have been integrated into the business model. For loans to sectors that are no longer served or are less served by banks, one can expect the development of secondary markets, through securitizations or other avenues. However, care must be taken to ensure that access to property for young people and the less privileged remains possible. The risk of inequality must be contained.

More broadly, new ratings and standards have been developed, but they must be harmonized, through common taxonomy, not only in Europe but elsewhere. It is a global market. The regulator sets the framework and determines the course for banks in order for them to clarify their positions. 

New supervisor profiles

Regarding the labor market in 2030, a set of events has contributed to the Employee Value Proposition PVE:

  • Demographics have changed. There are fewer candidates in the market and the employer has had to provide an attractive societal offering.
  • Work-life balance has become the rule.
  • Flexibility is at the heart of the company. Employees should have the opportunity to advance in their careers, but also the possibility to interrupt them when they wish.
  • Training has become essential. 
  • A pleasant working environment, combined with teleworking, has been put in place.

For supervisors, the traditional profiles of lawyers and economists have been augmented by computer scientists and data scientists. Psychologists have also been included because there is increased interest in the cognitive level, as well as in the cultural risk. In the same way that the scope of regulation has changed, the scope of supervisors has been expanding.  

CBDC: the primary role of the regulator

In 2030, we have a CBDC/digital euro, while the distribution model ideally focuses on credit institutions and payment service providers. Digital money must avoid disintermediation in order not to destabilize the financial system. With the digital signature, the digital system, the digital currency and open finance, it has been important to be particularly careful about too much digital mobility and its impact on safety and security of capital and data, while the role of the regulator is essential in ensuring adequate protections are in place. It is in this context, of increasing risks to our financial system, as well as consumer protection and safety, that the MiCA and DORA regulations, as well as TIBER – which allows us to carry out controlled and customized tests at the European level – have been implemented. 

About the interviewee

Jean Hilgers has a degree in economics and joined CGER in 1987, where he worked in corporate banking. After working in various ministerial offices during the 1990s, he joined the NBB in 1999 as an executive director.

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