10 May 2012

Joaquín Almunia: Europe's banking sector after the crisis - Oversight, regulation and responsibility

What remains to be done to put our house in order? In my opinion, there are four main steps to follow:

• breaking the vicious circle between public debt and banks’ balance sheets;
• reaching adequate levels of best-quality capital for banks;
• completing the restructuring, and pursuing orderly liquidation where necessary; and
• putting Europe’s banking industry in the best possible conditions to finance the real economy.

I will say a few words on each of these closely interrelated points.

Breaking the vicious circle between sovereigns and banks is the most urgent task. Both the European Banking Authority and the European Central Bank have taken action to address it: the EBA, with its request that banks reach a 9 per cent Core Tier 1 capital ratio by the end of June; and the ECB, with its Long Term Refinancing Operations, or LTROs.

The LTROs, in particular, removed the risk of an imminent funding crisis and eased tensions in the sovereign debt markets in the early months of the year. But these operations were not a silver bullet. We should continue to explore the conditions to set up and use the appropriate firewalls, which would ring-fence the European sovereign debt form speculative attacks, so that it is considered again as a risk-free asset in banks’ balances. We need to use the breathing space provided by these measures to design and introduce a new regulatory framework for the long run, and the Commission has been quite active on this front.

As to my second point – regarding the levels of capital – we have proposed two changes to follow up the Basel III agreements; the Capital Requirements Directive – or CRD 4 – and the Capital Requirements Regulation. The CRD 4 is currently being discussed in the ECOFIN Council and the European Parliament. The main issue at stake – among others – is the degree of flexibility that national supervisors might have to set capital buffers. Taking into account the significant cross-border spillovers, this is a sensitive issue which must be considered carefully and where a broad consensus is needed. At the ECOFIN level, a compromise is now being prepared by the Danish Presidency and there is every indication that an agreement will be reached when ministers meet next week.

These measures are putting pressure on banks as they continue their process of deleveraging. We should keep in mind that deleveraging is primarily driven by the need of banks to eliminate funding gaps, the most important of which are mismatches between long-term assets – such as loans – financed by short-term funding. This is one of the key measures that banks must take to return to a healthy condition. For the moment, banks are selling non-core assets and getting rid of risky loans in an orderly way. The role of supervisors is to ensure that the measures taken by banks to reach higher capital buffers do not lead to a contraction of lending to businesses and households, which would have dire consequences for the economy at large.

Moving on to my third point – restructuring – let me mention another element of the regulatory and supervisory architecture that we are putting in place: the new EU-level resolution framework. The crisis showed that when problems hit one bank, they rapidly spread across the system regardless of national borders. It also showed the lack of a mechanism to manage financial institutions in distress – again, especially across borders. To address these issues, the Commission is working on a proposal for an EU framework for crisis management to tackle bank failures at the earliest possible time and avoid or limit the cost to the taxpayer.

Amid the large public interventions in the financial sector, we must not lose sight of our main tasks, the integration of Europe’s financial markets, the preservation of a level playing field and the need to put the sector on sound footing. Clearly, State aid interventions carry the risk of a renationalisation of banking markets – and that must not come to pass. This is why I will not loosen competition and State aid rules during the crisis. I will also continue to insist that the banks remunerate the public support that they receive, and that they eventually repay taxpayers’ money to the state.

The effect of the measures I have just described will be to prepare the ground for the financial markets that will emerge from the crisis. In this new environment, banks will be more transparent, more resilient to withstand stress, and more focussed on their core business – which is providing finance to the real economy. This, the fourth step in my brief analysis is really the point of the whole exercise.

...Let me tell you that banks and other financial institutions should live up to their responsibilities. They owe it to the society that their business models are sound; their supervisors are well informed; and the regulation that oversees them includes adequate safeguards to control risk. Above all, I believe that they should bear a fair share of the cost of the resolution of their own problems.

European and national authorities, on their part, will continue to work together to build a sounder, safer and more efficient financial sector in Europe. I call on the banking community – and today on the retail and savings banks you represent here – to join us in our efforts to stabilise the financial sector and relaunch the economy.

Full speech

© European Commission