14 November 2012

Emilio Botín: Europe needs to embrace banking union

In an article for the FT, the head of Spain's biggest bank writes that "banking union is an ambitious, complex and difficult process, both operationally and politically, but we cannot afford to postpone it".

First, it means that we must enhance and align standards of banking supervision. No amount of regulation can substitute for airtight supervision. The crisis has revealed that not all banks were subject to the same degree of supervision, which is one of the reasons for their mixed performance in recent years. The European Central Bank is positioned to assume the supervisory role in the eurozone. This should be done gradually, with the ECB initially overseeing the largest institutions.

Second, banking union means we must enhance transparency. If we want a single market, there must also be a single criterion for applying the rules, and we must all be measured by the same standards.

Third, a single deposit guarantee mechanism and a single resolution model are essential to restore confidence and protect customers.

Alongside this work towards a banking union, a proliferation of financial sector regulatory reforms will soon take effect. Some of them should be re-examined.

In going back to basics, I see three crucial factors. First, solid corporate governance, including a board that is able to challenge management and has long term vision. Second, strong and independent risk management policies and procedures that allow a bank to anticipate events and define and control its risk profile at all times. Third, restoring the principle that banking should support the real economy by providing loans and financial services. This might sound boring but it still requires a great deal of experience, judgment and hard work to get it right.

Among these elements, none is more important than risk management, which forms the foundation of our business. Without strong foundations, it does not matter how big the building is: it will crumble. Without good risk management, it does not matter how big a bank is: it will fail.

Full article (FT subscription required)

© Financial Times