What does the sector understand by “low risk”?

A financial institution can be defined as a business that has been licensed by the public authorities to firstly attract public savings and then lend out these savings in a responsible manner. Protecting and investing customer deposits is a core task for the financial institutions, and confidence is a central aspect in that regard.

That confidence was dealt a severe blow by the financial crisis of 2008. In various cases, excessive attention to share prices and the short term led to unsustainable growth and profit targets, and to risks being taken that in some cases appeared difficult to manage. The consequences of the crisis were felt by the financial institutions, their shareholders, their financers and the whole of society.

Today, exaggerated attention on the short term has been renounced by the Belgian banks. Now, the financial sector is focusing entirely on putting itself at the service of people, society and the economy, rather than on achieving profit figures. The importance of the saver and the borrower is crucial in that regard.

This does not, however, mean that financial institutions (can) operate on an entirely risk-free basis. Even basic banking activities, such as providing credit, involve certain risks. For example, the financial institution is never entirely certain that the borrower can pay off its loan on time and in full, or that the financing the institution has today will still be there at the same price at the end of the life of its assets. 

In addition, risk is a relative concept. What is risky and what is not? Before the financial crisis, the illusion prevailed that zero risk was possible, for example for sovereign bonds. However, the events of recent years have shown that this was not the case.

The fact that banks should avoid risks is one of the contradictory demands society places on the financial sector: financial institutions have to provide cheap credit without taking the risks necessary to make this cheap credit possible. That is not feasible in practice, since the demand ignores the fact that by definition providing credit involves a form of risk and that this risk comes at a cost.

To fully play its role as a financer of the economy, a financial institution must be able to take socially beneficial and calculated risks. However, risks must be spread such that they remain manageable so as to avoid systemic risks. In this sense, banking is not about avoiding risks, but rather about managing them. Important steps have been taken in that regard, both by the regulator (See Supervision and regulation have changed) and the banks themselves (See Banks in Belgium have changed).