Constantinos Herodotou: Sustainability, digitization, profitability Statement of Mr Constantinos Herodotou, Governor of the Central Bank of Cyprus, at fireplace chat "Challenges for banks in a new operating environment" at the 10th Banking Forum, Nicosia, 9 December 2022. *** I would first like to thank Andrea for accepting my invitation to participate at today's event and share his valuable insights with us. In the aftermath of the two consecutive crises, the first round adverse effects have been limited for the banking sector. Nevertheless, with the level of uncertainty still tilted to the upside, the full extent of the consequences has not yet materialised especially in the area of credit risk. If we were though to draw a lesson from both crises, this would be the significance that technology plays for the banking sector, not only for the conduct of the normal banking operations but also for the sustainability of its profitability. The banking sector has proven resilient and continued to provide credit to the economy. However, the legacy structural weaknesses of the sector remain. At the same time, competition from challenger banks has been increasing. Therefore, the banks need to move more decisively in the road to digital transformation. This is presumably the only way if they are to address their structural weaknesses while retaining their competitive advantage against new players in the market. Investing in technology can become the catalyst in their effort to strengthen efficiency and build sustainable profitability.
Hong Kong may also be able to take advantage of the increased flow of funds for global investment which may be forthcoming from a greatly enlarged European capital market. Furthermore, to the extent that an offshore euro market develops, Hong Kong would be an obvious location for this in Asia. This reflects the existing large presence of European banks in Hong Kong and our role as a bridge between Europe and mainland China. Finally, Hong Kong is one of the world’s largest holders of foreign exchange reserves and the euro will provide interesting opportunities for diversification of our portfolio. Of course, the advent of the single currency also brings with it certain risks. The discipline imposed by the single currency will not always be comfortable, particularly when the business cycles diverge in different member countries. This could set up tensions which could at worst lead to a break-up of monetary union or at least undermine confidence in the euro. The current dispute between politicians and the European Central Bank over interest rate policy might be a foretaste of what is to come. A break-up of monetary union seems highly unlikely, but the potential for internal wrangling is clearly there and that could be disruptive to world financial markets. There must also be at least a possibility that closer integration of the EU could make it more self-contained and inward-looking. Intra-EU trade could increase, while that with the rest of the world and Hong Kong could diminish.