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We politicians, our people, but also investors, bankers, live in uncertain times, ever since the outcome of the British referendum, the UK and the continent have regarded each other with some suspicion.
Coming from the Netherlands, I strongly regret the outcome of the referendum, but we have to respect and accept the choice of the British people. In my mind, it is a lose-lose situation, which we must manage as well as possible. It is now in the interest of both the UK and the rest of Europe to come to a fair and clear arrangement for our future relation. A new settlement with clarity on how the British government sees the role for itself in the Europe of the future, on how to proceed with our trade and international affairs and to limit the economic damage to the UK and the European Union. [...]
We have added safeguards to strengthen our shock absorption capacity so our economies can keep growing in the future, our people can find jobs again and investors are willing to invest in our countries and companies. But this doesn't mean we're there yet. [...]
We have created a banking union, which aims to protect 340 million European taxpayers from future financial crises. The banking union was set up in only three years.
What are the results of the project so far? I see five key elements, which I will discuss in more detail in a minute: First, stricter and harmonized capital requirements. Second, enhanced supervision at European level. Third, making bail-in the new norm: if a bank gets into trouble, its investors must foot the bill. Fourth, resolution of failing banks at European level and setting up of a single resolution fund. Fifth and finally, we are determined to create a European deposit insurance scheme once remaining risks have been sufficiently reduced in the coming years.
These important steps will make banks and governments better prepared for possible shocks in the future.
Where are we now?
The European financial sector is in a much better shape than before. Thanks to the first two key elements of the banking union - stricter common rules and the single supervision mechanism - problems in bank balance sheets have become transparent in a uniform way. This is good news, because although this transparency shows that challenges remain, it also ensures that banks take their responsibility and take steps to become more resilient.
So banks can contribute to the recovery of the real economy and further reduce the negative feedback loop between sovereigns and banks.
As I said, we aren't there yet. A number of banks throughout the eurozone still suffer from a high stock of non-performing loans. These loans are putting pressure on bank's profitability and their ability to provide new credit. This is slowing down the economic recovery in a number of our countries. The gross carrying amount of these loans in the EU amounts to over a trillion euros. Insolvency laws in some countries have recently been modernized. But In practice there are also obstacles like the capacity of the courts. Therefore out-of-courts settlements are badly needed. The European Commission will propose legislation very soon.
But banks cannot afford to simply sit on their hands and wait. Without timely and adequate provisioning and write-offs of loans, their long term profitability and viability are at risk. While this might be painful in the short run, banks need to be ambitious, and raise additional capital if necessary, to survive in the long run.
Also, some banks still have a lot of scope for improving cost efficiency. Bold measures are needed to cut costs further. In addition, many banks have been hit by large fines due to unethical behavior. And I hope to say: unethical behavior in the past. These fines have been a drag on the recovery of some institutions. Here, prevention is better than cure. To survive in the long run, banks should always view things from the perspective of their clients and do what is right for them.
Earlier I mentioned five elements of the Banking Union. The third element, bail-in, is crucial. I am well aware, that some say bail-in is too painful, risky, and hard to apply. But it ensures that we won't have to save banks with taxpayers' money anymore. It is a sound economic principle and deals with losses in a fair way. Some may worry about stability, but I firmly believe that bail-in will ultimately safeguard stability and strengthen bank's resilience. And it gives markets an incentive to price risks as accurately as possible.
The effects are already becoming visible. Major rating agencies have downgraded their expectations about public support to much lower levels in eurozone countries. And several studies show that investors are responding accordingly. For example, we see an increase in the difference between banks' CDS spreads and the spreads of their sovereigns, which means that investors believe in the principle of bail-in.
The newly established Single Resolution Board, the fourth key element I mentioned, has not yet had to deal with a failing bank. This might sound a bit odd, but it makes sense, because bail-in also has a very strong preventive effect. The threat of bail-in has caused banks to increase their buffers by raising private capital, issuing shares or merging with other banks. In Greece, for example, the threat of bail-in late last year significantly increased private participation in the recapitalisation process of some Greek banks, thereby reducing the public burden. The same can now be seen in Italy. Private solutions are once again preferred.
What do we, the governments, do?
Let me reassure you: it's not all up to you.It's also up to governments. This brings me to the fifth element of the banking union: creating a European deposit insurance scheme once the remaining risks have been sufficiently addressed. I think we politicians should do two things in this respect:
First, we need to finish what we've started.
The banking union is a work in progress and we - the legislators - have to complete it so we have the right framework in place to deal with future crises.
One of the most important next steps is to start working on the Commission's legislative proposals that are expected before the end of the year. They should focus on reducing the risks that still exist. For example:
Another important element in reducing risks in bank balance sheets is the prudential treatment of sovereign exposures to banks. We're still waiting for the Basel Committee's findings, but we'll return to this issue in the future and consider the way forward in Europe, as this will also help to break the vicious circle.
The sooner we achieve these reforms, the sooner we'll be able to work on further steps to share risks. For example by creating a common backstop for the single resolution fund and introducing a European deposit insurance scheme.
The second thing we politicians need to do is stick to what we have agreed.
[...] European banking supervision and stricter prudential regulation will ensure we address the legacy problems in banks, and prevent the build-up of future risks. Bail-in limits the bank-sovereign nexus and helps set investors' incentives right. That's what we agreed to do. And it's important that we all remain committed. This brings clarity and stability. And that's how we contribute to further economic recovery throughout the eurozone. [...]