Banking sector closes down affiliates at a higher rate

Erasmus School of Economics

In an article from Trouw, the current developments in the banking sector are investigated. Casper de Vries, Professor of Monetary Economics at Erasmus School of Economics, places the current situation in perspective and shines a light on the rationale behind these major alterations.

Due to a combination of factors, the banking sector is in severe financial distress. Banks try to alleviate this financial stress by means of closing down affiliates and dismissing employees. These numbers presented to us by banks are a cause of concern for many. Closing down hundreds of stores and dismissing as much as 2,700 employees can be classified as a considerable restructure. According to De Vries, the majority of these alterations have been initiated before the arrival of COVID-19. One of the causes for the reform is a change that has been gradually taking place for several years. The demand for cash has been steadily decreasing, since payments are made more and more without cash. The global pandemic has amplified this movement; it invoked an acceleration of the implementation of the new banking strategy, which focuses more on online transactions and service. De Vries: ‘In many stores, cash isn’t appreciated at all anymore’.

European Central Bank

Another factor of concern putting pressure on the current revenue model of banks, is the policy of the ECB. In the interest of stimulating the economy, the ECB utilises its instruments to keep interest rates at an all time low. By doing this, the idea is that companies and private individuals can borrow money to a low interest rate, which stimulates consumption and investments. This poses an obstacle to commercial banks: they intend to loan money at a higher interest rate in comparison with the money they borrow to generate revenue. With interest rates approaching or hitting the zero lower bound, their model is highly ineffective. Since this means less revenue, banks have to interfere with the cost side.

Money-laundering

In the meanwhile, the banking sector has another expense it has to cope with: dealing with money-laundering activities. In order to locate these illegal activities, banks have to invest in IT-experts and maintain an expensive system. How is it possible that banks have to dismiss employees while their needs for IT-staff are at an all-time high? To some it might sound counter-intuitive, but according to De Vries, the qualities that an employee has to possess to operate within a digital area are vastly different from those of the employees that are being dismissed. ABN Amro investigates the possibilities of retraining current employees, but the similarities between qualities seem to be insufficient to efficiently facilitate this option.

Professor
More information

You can read the article from Trouw, 30 November 2020, here.

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