Ahead of the Paperjam Club’s , which will take place on 19 November at the Kirchberg Kinepolis, we have decided to give the floor to key players in the financial centre. We’re publishing their guest contributions every morning until the event. Today, , chairman of the Luxembourg Bankers’ Association, gives his analysis.

European companies are facing a number of major challenges if they are to remain competitive. Innovation and digital transformation are essential to improve efficiency and adapt to new technologies. The ecological transition, driven by the European Green Deal, requires considerable investment to reduce carbon footprints and adopt sustainable practices. At the same time, international competition is increasing the pressure on businesses, as is the management of global supply chains. The shortage of skilled labour and the complexity of regulations also hamper their competitiveness. In addition, the incomplete integration of the European single market, disparities in the transposition of European directives and de facto or de jure barriers complicate cross-border operations.

Business competitiveness and the prosperity of our fellow citizens go hand in hand. Successful businesses create jobs, stimulate economic growth and raise incomes, generating tax revenues that fund public services such as health and education. In addition, their ability to innovate and adapt to global challenges, particularly the ecological and technological transition, ensures sustainable development that benefits society as a whole.

The recent Draghi report highlights the essential reforms needed to strengthen the competitiveness and innovative capacity of the European economy. It stresses the need to restructure financial policies in order to support high-growth sectors and close the innovation gap with competitors such as the United States and China.

In this context, the former prime minister of Italy stresses the importance of financial services and cross-border capital flows, real opportunities for international financial centres such as Luxembourg. However, he warns of the limits of the current model for financing the economy, a crucial point that should prompt players in the banking sector to think carefully.

So how can we consolidate the position of the Luxembourg financial centre as a key hub for cross-border economic flows? And how can we further strengthen the capacity of Luxembourg banks to support the digital and sustainable transformation of the European economy, for the benefit of as many people as possible?

When it comes to banking services, we already have a solid foundation. We are diversified around five pillars: retail banking, private banking, corporate banking, custodian and depository banks, and payment services. Each of these pillars plays a crucial role in the movement of capital and has experienced strong growth over the last fifteen years. A recent study by the European Central Bank puts our financial centre well ahead in terms of cross-border deposits in the eurozone. More than 75% of the loans granted by Luxembourg-based corporate banks are directed internationally. Almost 85% of the clients of our private banks are European. Around 15% are based on other continents. The challenge is to maintain the performance of these five sectors, while increasing their contribution to the so-called real economy.

It is also a question of strengthening their financing capacity, for example by encouraging advances in securitisation, or freeing them from certain regulatory constraints that prevent them from supporting more entrepreneurial or innovative business models, and therefore sometimes also riskier ones, such as those focused on sustainable and impact-based themes. In this context, synergies with private equity should be further intensified.

However, it is also important to take a clear-eyed look at the challenges that lie ahead over the next ten years. And to do that, let’s start by looking at what has happened over the last two decades.

Since the crisis of 2008-2009, the banking sector has undergone a regulatory race of unprecedented density and scope. Without denying the beneficial effects this has had in terms of catching up on stability, the fact remains that today we are undoubtedly one of the most heavily regulated sectors in the world. This regulatory race has its costs. According to a study by the European Banking Federation (EBF), the European banking sector spends around €100bn a year on compliance, and 10% of bank staff are dedicated to compliance tasks. A study that the ABBL conducted together with EY over the 2017-2019 financial years also showed that Luxembourg banks invest an average of €548m a year in compliance.

So the question is, how can we remain competitive and compliant in the long term? All this against a backdrop of ever-increasing constraints--whether in terms of sustainability or cybersecurity--and ever-increasing needs, particularly in terms of financing the sustainable and digital transition and European autonomy.

The answer to this equation is twofold: we need to regain greater agility and continue to climb the ladder of value creation.

Let me explain.

Regulation has reached such a level that the banking sector and regulators are struggling to keep up, which is hampering banks’ ability to adapt quickly to their customers' needs and support the economy. To put it more simply: we have become too complicated. The issue of , which is widely discussed locally, is a perfect example.

In Europe, the time has come to ask whether we really need more regulation or rather better regulation. Does the proliferation of complex rules--such as yet another revision of the anti-money laundering directive--really contribute to better risk management? Should we not apply more proportionality in regulatory matters? Shouldn’t our leaders re-examine the impact of regulation on competitiveness? What is the benefit of being the best pupil when it comes to regulation if other countries are more flexible and manage to remain competitive? Take, for example, the Basel III discussions: between American and European banks, which will be better equipped to finance the economy? And when it comes to sustainable finance, which will win out: the European, American or Asian financial centres?

The aim is to remain profitable over the long term while remaining compliant over the long term

Yves Stein, chairman, ABBL

Rediscovering a surplus of agility that will enable banks to facilitate and accelerate capital flows even more effectively is essential, not only for the economy and the prosperity of our citizens, but also for the profitability of the banks and therefore their long-term survival. I repeat, the aim is to remain profitable over the long term while remaining compliant over the long term.

Let’s not kid ourselves. For the reasons I have just mentioned, European banks are losing the competitive race to their American and Asian counterparts. For the members of the ABBL--and without denying the many advantages that our country has to offer--there is also a cost structure that does not necessarily favour our country. As we can see from the relocation or outsourcing strategies of certain players--a phenomenon that does not only affect our country--the future of the financial centre is no longer to be the back office of large financial groups. We must continue to climb the ladder of value creation.

We can do this by focusing on qualitative growth, in particular by targeting European and international players whose activities are complementary to those of the Luxembourg financial centre, or to whom Luxembourg can offer real added value thanks to its specific characteristics. One of our main challenges will be to attract even more players and skills in the field of asset management.

We also need to be able to support our existing teams, so that they too can move up the ladder. This means investing heavily in training, which is why the new places particular emphasis on this issue. However, investment also means financial resources. Here too, the question of profitability is not neutral. A bank that makes money will be in a better position to invest in the employability of its staff.

But investing in our existing workforce is not enough. Between now and 2035, we will have to renew 50% of our workforce because the baby-boomer generation and those of generation X are or will soon be of retirement age. That’s a huge number. So we'll need to attract new, skilled and motivated talent who can rise to the challenges of tomorrow. It is highly likely that our natural recruitment pool will not allow us to meet demand. We will have to recruit from further afield and go head-to-head with our international competitors by hunting in their territory, i.e., in the major universities and business schools in Europe and around the world.

But attracting young talent brings me to the elephant in the room: accommodation. How can we attract such talent if we don’t know where to house them? I’m thinking of both qualified staff from abroad and young locals who want to pursue a career in banking.

Of course, solving the housing crisis is not the sole responsibility of the banks. However, we want to contribute to this collective effort. The ABBL is committed to regularly proposing measures to the government to revitalise the housing sector. Our members active in the financing of residential housing are mobilising resources and showing their willingness to work together to put in place new mechanisms aimed at restoring the confidence of first-time buyers and investors. I am thinking here of the , which admittedly got off to a , but which I am sure will be one of the tools for recovery.

However, it is clear that we need to go even further. Constructive dialogue between all the stakeholders is needed to develop innovative and appropriate property financing models, in order to make housing more accessible to all. I see particular potential here in public-private partnerships, where the ABBL could in future take the initiative or at least play a more active role as facilitator.

Nevertheless, I would like to conclude on a positive note. I think we are at a turning point in terms of competitiveness and regulatory amplitude. There is a real awareness of this issue at European Commission level. Furthermore, as far as Luxembourg is concerned, we can count on contacts at ministerial level and at the level of our supervisory authority who have a minute understanding of the challenges facing the financial centre and who have this ability, which is not found anywhere else, to think internationally. All this is essential for a financial centre like ours.

So there is every reason to hope that Luxembourg will remain a financial centre at the heart of Europe, making a lasting contribution to the competitiveness of businesses and the prosperity of its citizens.

Yves Stein is chairman of the Luxembourg Bankers’ Association (ABBL).

This article was originally published in .