The past few years have been rough for the financial industry, and banks are still highly vulnerable globally. Banking in Europe is not exempt from risks and turmoil in the financial system. Rising interest rates provide opportunities for them to make more money but also increase the risks that make the system more fragile. Issues in the banking sector also pose some issues for entrepreneurs doing business in the region. Regulatory measures are being implemented to increase European banks’ risk management, and these initiatives are worth knowing about as they can guide companies to make better decisions and be prepared for changes.
An Impact on Lending
The Basel IV framework is set to bring new standards for setting the capital requirements for the banking sector, aiming to harmonise how banks calculate risk. After noticing much variability in banks’ calculation of risk-weighted assets, the Basel Committee on Banking Supervision (BCBS) these reforms were formulated to constrain banks’ use of internal risk models. BCBS set January 1, 2023, as the global deadline for Basel IV. Wolters Kluwer notes that Basel compliance, however, will depend on local jurisdictions defining the actual implementation deadlines, possibly in a phased approach. Banks will need to examine risk and rethink their business models and strategies to enhance growth, competitiveness, and profitability.
With the implementation of Basel IV, businesses will likely be affected by these reforms. The framework’s higher thresholds will limit banks’ ability to lend to businesses as capital requirements will be increased. Research from the University of Ljubljana on macroprudential policies notes that small and medium-sized enterprises (SMEs), in particular, already have difficulty obtaining bank financing due to these regulatory standards for managing risks in the banking sector. Companies will most likely need to review all sources of funding and look out for other potential options to minimise the impacts brought on by the change.
The Resurgence of Reg-tech
After the financial crisis of 2008, regulation technology, or ‘reg-tech,’ was an innovation that aimed to prevent another crisis of this scale from occurring again. With trouble brewing in the European banking sector once more, reg-tech may be the solution for better financial reporting and risk management. The World Economic Forum points out that reg-tech enables the “pulling” of data, removing the need for manual reports and human supervision and making the exchange of financial information faster and less erroneous. This could make supervision more uniform and on-point with real-time analysis and calculations. In Europe, reg-tech monitors transactions for fraud, assesses a customer’s ability to pay back a loan, and detects money laundering cheques.
The implementation of reg-tech comes with challenges, however. While technology makes processes faster, the increased reliance on digital solutions creates a rich environment for cybercriminals to commit cyberattacks and crimes due to easy access to vulnerabilities. Reg-tech software needs to be constantly updated with good cybersecurity practices or be subject to more regulation to ensure the data is secure; if not, both banks and businesses could suffer major consequences. Entrepreneurs doing business with European banks will also need to tighten cybersecurity measures.
Crisis in Confidence
With the failure of two major banks in the United States this year, European banks are seeking more assurance as confidence decreases. Resiliency is becoming a significant concern, as more bank collapses could ripple through the financial system and cause global issues. Businesses also rely heavily on bank loans to fund their growth, and weakened confidence could trigger further turmoil in the sector.
Entrepreneurs need to be wary of their confidence and reliance on banks and monitor the current trends and risks in the industry to make the right choices at the right time. Other sources of finances besides loans or business profits can be explored for wealth-building. Our post “5 Streams of Income That Will Grow Your Wealth” highlights many ways to earn and build money. Investing, royalties and licensing, and real estate syndicates can help generate a passive income and alleviate reliance on loans or profits.