Today, the European Commission is adopting a major proposal to restore stability to financial markets.
The initiative is the outcome of a long consultation and preparatory process. It translates the firm will of the Commission to learn from the crisis and fully implement the decisions take by the G20. This proposal will have a decisive impact on bank activities and behaviour, and this is an objective I am pursuing with determination.
We are undergoing turbulent times. A few months ago, some people wanted us to believe that the earthquake was over, and that there was no more need for reforms. But in fact the earth tremor continues.
This crisis, these successive crises, have put financial markets in Europe to the test.
I. Confronting the crisis, week after week, with a global answer:
We have learned from each weakness revealed by the crisis, and propose responses to address the issues raised.
Our approach is comparable to that of road safety. One cannot improve road safety by not acting to address all the risk factors. If one single driver lacks vigilance, or one single rule is not properly implemented, catastrophe can strike everybody. To act on one single aspect would thus not be effective.
Therefore, we propose to respond to each facet of the risk:
-first, we establish stringent road traffic regulations, which will apply to everybody. This comes in the form of our Single Rule Book for financial regulation;
-second, we create police forces, in the form of the new supervisory authorities, and we reinforce the sanctions (CRD 4 and the Market Abuse Directive)
-Then we introduce more visibility on the network, with new transparency rules (in particular on derivatives trading and the operation of hedge funds, with AIFM)
-we also improve the quality of the infrastructure network (with the Markets in Financial Instruments Directive) ;
-last, and this is our proposal today, we demand that the vehicles themselves be sufficiently solid and equipped to resist a shock - and that the drivers be able to properly drive the vehicles.
This last point is the main subject of the proposal adopted today: to improve the behaviour and the solidity of financial actors, and particularly banks.
II. This proposal implements the Basel III prudential rules
Let's be clear: the European Commission has wanted a proposal which fully respects the spirit, the letter, the level of ambition and balance of Basel III.
We are the first region in the world to implement Basel III - and not only Basel II - to the whole financial sector: 8.200 banks accounting for more than 50% of world banking assets will be covered. Compare this to some 20 big banks in the US, for which Basel III is not yet fully applicable, and which are currently in the process of transition towards Basel 2.5.
Our proposal translates precisely the new requirements of Basel III.
1.First, we require the banks to hold:
-stronger capital requirements (8% plus two supplementary layers, which each can amount to 2.5%, or even more for the counter-cyclical buffer) ;
-better quality capital;
In proposing this, we are drawing one of the main lessons of the crisis - overall, the banking sector was not capitalised enough when the crisis occurred and liquidity requirements were insufficient.
2.Second, our approach gives priority to prudence and solidity:
-to be able to distribute dividends and bonus, banks will have to hold a significant capital conservation buffer.
-in case of an overheated credit cycle, banks will have to hold a "security buffer", which will play a counter-cyclical role, allowing them to continue serving the real economy in case of crisis (the counter-cyclical buffer).
3.Third, we set-up rules regarding liquidity:
-We will ask banks to respect the rules defined in Basel to manage liquidity risk, in both the short and longer term.
-In both cases, a coordinated observation period, foreseen by the Basel agreements will allow us to refine the parameters of the envisaged measures, before they become binding.
4.Last, we propose a leverage ratio for capital and assets, as well as improved measures to account for counterparty credit risk linked to the exposure to derivatives.
III. Common rules for a Single Market:
1.Our proposal includes two interrelated instruments: a directive and a regulation.
Why propose a regulation? Because our objective is not only to transpose Basel III, but also to put in place a Single Rulebook, listing the rules that are directly applicable. In contrast, a directive can be transposed differently by the different Member States. This was specifically asked for by the European Council in June 2009.
Why this instrument? Because we need the same rules for everybody to build a real Single Market for financial services, allowing supervisors to act together in a coordinated way and without any possibility of regulatory arbitrage. This is a question of economic efficiency as well as of financial stability. If we want the supervisors to effectively control European-wide groups, they should be able do it with the same rules, not 27 series of different rules.
2.Common rules do not mean that we do not take into account national specificities and the precise risks faced by each bank.
As such, our regulation includes all the necessary flexibility to allow supervisors to respond to the risks they identify by setting additional capital requirements at the appropriate level.
-each Member State will be able to set the parameters applicable to some specific risks (e.g. real-estate credit) ;
-each Member State will be able to set the exact level of the counter-cyclical security buffer according to its own economic situation;
-supervisors will be able to require a bank considered to be more at-risk to hold more of its own capital.
The important thing is that the core requirements, which are not linked to any specific fragility, be the same everywhere. There is no reason for the core prudential rules to be different in Madrid, Warsaw, London, Paris, Rome and Berlin.
Any national approach to reinforce bank stability would be totally illusory in a Single Market -difficulty faced by one European bank has an impact on the whole sector. If we do not build stability together, we will live under the illusion of stability behind outdated borders.
IV. Taking into account European specificities and the financing needs of our economy
1- We are totally faithful to Basel's spirit, letter and level of ambition. But you cannot apply rules to 8.200 banks as you would to 20 banks.
That is why we take into account the specificities of the European banking sector, with its mutual or cooperative banks (13% of the European banking sector) and its bank and insurance groups.
2.I am convinced that it is time to put the banking sector in order. But I certainly don't want to destabilise the financing of the European economy!
The new prudential rules will represent a considerable effort since our banks will have to find some 460 billion euros of additional capital; but:
-the effort will take place over period of time from 2013 to 2019,
-it will be accompanied and compensated by an increased level of trust -it this trust which we are lacking today. With our measures, the probability of severe systemic crises should decrease by 70%; and when they will occur, the crises will be less serious.
The Basel committee predicts that the EU's GDP will increase by 0.3 to 2 percentage points per year, once all measures are fully implemented.
V. Our proposals go beyond Basel in terms of governance and supervision
CRD 4 does not limit itself to transposing Basel III. It also improves the governance and supervision of banks and investment companies.
In terms of governance, the appointment of Board members will have to fulfil new criteria, related in particular to availability (impossibility to cumulate certain functions). In addition, banks will be required to establish a diversity policy for their Board members (encouraging gender equality).
Last, we will give the supervisory authorities the means to implement the new rules. To this end, we propose that all supervisors have power to impose dissuasive fines and sanctions to the banks to ensure compliance with the requirements, in particular in terms of reporting.
The European Union is living up to its responsibilities. We now expect our partners to take theirs too. I am coming back from Washington D.C., where I had the opportunity to discuss this subject with the Treasure Secretary, Timothy Geithner. Financial stability is a global objective, and the new rules will only be effective if they apply equally and at the same time to everybody.
I would like to conclude on a hot topic, which directly concerns European banks and which we tackle in our proposal: the role of credit rating agencies.
We are too dependent on credit rating agencies. As a result, I wish to suppress as much as possible the reference to credit ratings in the prudential rules. This is essential for financial stability.
Today, we propose to strengthen the requirement for the banks to lead their own risk analyses, without relying mechanically on credit rating agencies.
These proposals will be followed by a new legislative initiative aiming at improving the framework for credit rating agencies, in particular regarding their activity on sovereign debt.