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Banks and the real economy: renewing cooperation to boost local development

Crocetta del Montello (Treviso), 21/02/2018, National Conference

The participants at this National Conference noted that after a decade of profound economic and social crisis, some encouraging signs are emerging on a macroeconomic level that lend hope to the possibility of reestablishing a virtuous circle between the financial system, the real economy, and society at large. It was acknowledged, however, that there are still many challenges to be addressed, including regulation and the technological acceleration that has led to the advent of the fintech phenomenon.

From a regulatory standpoint, it was observed that, on the one hand, there has paradoxically been a proliferation of rules – and of oversight bodies – in respect of banking activities, and, on the other, a legal vacuum has opened up with regards to unconventional finance, which operates outside the banking system and is capturing a good proportion of value, turning established business models on their heads. Indeed, there are some areas, such as blockchain technologies, where it is not even clear whether and how regulators are able to intervene.

As regards the second cluster of challenges, namely, that linked to the unfolding digitalization process, it was highlighted that the fintech phenomenon has definitely grown by exploiting the crisis of trust between banks and customers, helped along by the emergence of the Millennial generation. It was suggested that the question to be confronted here is whether to “beat them or join them”. It was taken as read that blockchain technology and Artificial Intelligence (AI) will not supplant banking institutions: in Europe, there are already examples of banks that are entirely guided by AI ​​in their investment strategies, which shows that pooling the resources of both realms is possible.

The situation was viewed as compounded by the disruptive effect of Big Data, which is capable of shifting decision-making centers and altering power relations between actors, in a world where the control of data bestows power, with enormous repercussions for privacy protection and, more generally, for the preservation of trust between banks and clients.

It was stressed that banks need to avoid falling into the “algorithm trap”: the relationship with the client must remain the focus of business models, pursuant to a strategy that personalizes (rather than standardizes) that relationship. In this regard, it was felt that Big Data, if properly deployed, could prove an extraordinary asset. At the same time, the transparency that customers (especially Millennials) are increasingly demanding must be ensured.

Recognized as complicating matters was the interplay between the digital revolution and the question of regulation, making the latter an even more pressing issue. Indeed, it is precisely because of the ramping-up of technology that there is a growing gap between the moment new phenomena emerge and the point when authorities manage to intervene to regulate them, thus leaving scope for operations that are hazardous for the stability of the system. The participants hence emphasized the need to work to find a balance between rules and stimulating innovation: while regulation should preserve the stability of the system, it must not take away important resources from banks that could be invested in technological innovation.

At the local-area level in Italy, where small enterprises prevail, the role of business networks and "intermediary bodies" was deemed more crucial than ever in reaching critical mass, acquiring expertise, and approaching institutions and the financial system with the credibility necessary to launch new projects.

Continuing with the theme of strengthening local-level ties, it was posited that ad-hoc measures such as value-chain financing mechanisms could prove invaluable, as such facilities, if properly developed, could help link banks and production chains, bringing vital resources to local areas.

More generally, it was suggested that any proposed measures should ideally be underpinned by a renewed local-area emphasis, based on approaches that focus on the creation of economic (and not just social) value. It was stressed that the local context is capable of providing banks and businesses with those assets – ranging from infrastructure to human capital – that are indispensable for developing profitable and sustainable long-term business models. Only in this way can banks and businesses once again join in a shared journey and build on the early signs of impending recovery.