03 March 2015

European Commission: A strong and stable banking system at the heart of Europe’s recovery

Speech at 6th Convention on Cooperative Banks in Europe

But to be seen as part of the mainstream, where I want it to be, parts of the financial sector have to change. I know you don’t want ever more prescriptive regulation. And nor do I. But then in all parts of the banking sector, there needs to be strong values and culture and a reconnection with society, businesses and customers. If banks can do that, they will find in me someone who will champion the contribution they make to growth and jobs.

State of play

The last 5 years have been a period of intensive rule making. And banks have been in the eye of the storm. It was a difficult task to craft rules that make sense everywhere in Europe. But it was nonetheless a crucial one. We had to respond to the financial crisis and to help restore financial stability and public confidence in the financial sector.

To start with, we focused on creating the single rulebook; to ensure that banks were better capitalised and risks better controlled.

As the financial crisis evolved and turned into the Eurozone debt crisis it became clear that, for those countries which shared a currency and were even more interdependent, more had to be done. In particular, we had to break the vicious circle between banks and national finances. So we created the Banking Union. We made the European Central Bank the single supervisor for the Banking Union, and we put in place supervisory cooperation via the European Banking Authority. As a result we now have the strong institutions in place with the skills they need to do the job properly.

Last year, we put the new arrangements to the test. The largest European banks were subjected to the Comprehensive Assessment, made up of the stress test and the asset quality review. It was the widest and toughest test ever. The AQR element alone involved an in-depth examination of some 3.7 trillion euros worth of Eurozone banks' assets.

The aim was to identify and address any remaining vulnerabilities in the EU banking system and to dispel doubts about their health. This was to help restore trust and investor confidence and allow the banks to get on with their primary business: lending to households and businesses and financing the rest of the economy.

he European Banking Authority and the ECB did an excellent job. The results showed the European banking sector is now more resilient and much better capitalised – by over 200 billion euros in the last year alone. EU banks’ capital ratios are now at 12%, similar to levels in the US. And the vast majority have a significant buffer to withstand future shocks, which should help reassure investors.

Not every bank passed the test with flying colours and some weaknesses were identified. But, having shone the lights on these weak points, supervisors both in the SSM and outside the Banking Union are now working hard with the banks concerned to put this right. I was pleased when I was in the US last week to hear that regulators there think our tests were credible – as of course, most importantly, did the markets.

So banks are now stronger as a result of the new regulatory framework, the actions supervisors have taken, and market pressure. This will put them in a better position from which they will be able to lend again. We must continue to remain focused on securing financial stability because we need financial stability if our growth is to be sustainable. That is why I am committed to finalising rules on Bank Structural Reform, money market funds and benchmarks, and to bringing forward new proposals to deal with risks arising from entities other than banks when they need to be resolved.  

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So what further work lies ahead in terms of our banking sector?

The job of delivering a legal framework for Europe's banks is not yet finished. We need to complete the details that will make the Capital Requirements Directive and Regulation, the BRRD and MiFID work in practice. A lot has already been done by both the European Banking Authority and the Commission. We are more than half way there with CRR/CRD level 2 measures, and I hope that by the end of the year we will have completed this legislative steeplechase.

In this regard, I would like to thank the EBA for the high quality of their work in preparing large volumes of draft implementing legislation under fierce deadline pressure. I am very grateful for the very positive cooperation which has been developed which is critical to the successful development of the single banking market.

The reforms have brought significant changes to banks – to their capital levels and their liquidity. We want to examine how these changes have affected banks’ ability to lend to businesses, infrastructure, and other long-term investment projects. In particular, we will need to investigate how all the recent changes have affected banks' ability to support local businesses.

This summer, I will launch a consultation on the impact of the Capital Requirements Regulation on lending to corporates and on long-term finance, with a specific focus on SMEs. I will welcome comments from banks, regulators, and companies on this issue. Drawing on this feedback and other research work, I will come up with conclusions on the impact of increased capital charges on lending to businesses. We would use that insight to determine whether changes might be necessary to the CRR.

Full speech

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