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The financial reforms we have introduced in Europe over the last five years could nearly all fit under the three headings of this conference: Customers. Growth. Standards. What have been the key elements of financial reform?
We addressed failures of supervision by creating an entirely new supervisory system for Europe. We tackled the banks' lack of capital and liquidity. Brought in obligations to hold more and better capital. We reformed the opaque and largely unregulated derivatives markets. We brought credit rating agencies under control and set strict rules to address conflicts of interest. We recently made proposals to address the financial stability risks posed by the shadow banking sector and proposed to regulate financial benchmarks.
A word on the touchy subject of bankers’ bonuses: The financial crisis was caused in part by excessive risk taking and inadequate risk governance. We strengthened the existing framework to help restore people's confidence in the financial sector. And CRD 4 introduces rules on bankers' pay as part of a balanced political compromise. This is not about employment policy or interfering with salaries, but about ensuring that banks manage risks and remain prudentially sound.
The issue of bankers’ pay is in fact the only one on which the UK has been outvoted since I have been in charge of financial regulation. Consensus is very important to me. Support from the EU’s largest financial hub essential. So I regret what happened in this case and I regret the UK has chosen to take a case to the European Court, especially when the rules are in line with international principles agreed in the context of the G20 and the FSB.
Bank structure
First, despite all the progress made as regards more stringent capital rules and new resolution tools, there may still be banks that are too big to save and too complex to resolve. That is why we are working on a common framework on the structural reform of banks and plan to come forward with a proposal in the coming weeks. This is also to prevent divergent solutions - in individual EU countries – could disrupt how the European market works. Nobody would gain from that.
Asset Quality Review
Despite substantial improvement, more needs to be done on the quality of banking assets in order to restore full confidence in the EU banking sector. The European Central Bank’s assessment of banks’ balance sheets and the EBA’s asset quality review will provide further reassurance. We don’t expect dramatic results, but of course, these exercises may throw up certain funding gaps. And we will have the necessary tools in place to address the weaknesses.
Either banks with capital shortfalls will need to reduce their assets or they will have to go to the markets. The latter are now operating much more smoothly. If banks are not able to raise capital in the markets – which could still be the case for a few – we will have a clear framework in place, with bail-in, and national and if necessary European backstops.
Banking Union
Banking Union is a crucial project for stability and growth. The first step was finally concluded Tuesday. Ministers approved the Single Supervisory Mechanism on Tuesday. We now need to pay urgent attention to finalising the Single Resolution Mechanism and the Bank Recovery and Resolution Directive.
Speech by Chief Secretary to the Treasury, Danny Alexander
Bloomberg News and the Wall Street Journal covered the speech, citing Barnier as saying that "it’s difficult but possible" to get an agreement by the end of this year on plans to set up a centralised euro area system for winding down failing banks. The move had been billed by EU leaders as a key pillar of their project to build a Banking Union that breaks links between banks and national governments by transferring power to the European level.
The WSJ says Barnier warned that the European Union needed tighter rules to tackle the risks posed by banks that are 'too big to fail'. Proposals on how to tackle such risks will be a follow up on the so-called Liikanen Report into the question of separating banks' riskier activities from the more utility-like provision of retail banking. The UK government has anticipated the EU's response by already adopting as policy most of the recommendations of the Independent Commission on Banking, which effectively ringfences domestic retail banking from the investment banking operations of the largest institutions. However, draft French and German laws on the reorganisation of large banking groups have taken a far less bold approach.
At the sidelines of the conference, Barnier was reported by journalists of the Wall Street Journal and Reuters to have threatened the US with tit-for-tat retaliation if it presses ahead with proposed legislation requiring foreign banks to hold higher levels of capital locally. "I don't want to be forced to do the same as the Americans", he said, adding that he wanted to strike a "free and fair banking relationship" that would reflect the legislation that the EU and US have put in place since 2011 to strengthen their banking systems. "But if we don't find such an agreement, then we will end up having to do the same thing", he said.