Commissioner for Financial Stability, Financial Services and Capital Markets Union
"Bank Supervision: Europe in global context"
I am delighted to be here on the first anniversary of the SSM. That gives me the ideal opportunity to congratulate Mme Nouy and her team for all that she and they have done in getting Europe's single supervisor off the ground in record time. So much so that it is easy to forget that this only a year ago that the SSM took over the supervision of some 6000 banks. The transition of supervisory tasks from national authorities has been remarkably smooth. Today, the SSM feels so much part of the furniture that it is impossible now to imagine life without it.
One of the earliest tasks was of course to carry out the Comprehensive Assessment. It confirmed that our banks are more resilient and better capitalised. EU banks' ratios now stand at 12%, a similar level to the United States. And where shortcomings were identified, work was put in hand to plug the gaps. But I think the broader response to the Comprehensive Assessment also confirmed that people had confidence in the SSM's ability to do the job.
At the same time, the SSM has been working to build a more consistent approach to supervision. This was always going to be a gradual process. But good progress is being made to harmonise Options and National discretions. You need to be able to compare apples with apples if you are going to be an effective supervisor.
I am also delighted that the Single Resolution Board is up and running. Mrs König and her team are busy doing the spade work so that the second leg of the Banking Union - the Single Resolution Mechanism - can be fully operational next January. This will mean that if, despite the SSM’s strengthened supervision, a bank fails in the Banking Union, the SRB will be there to manage its orderly resolution. These are big steps forward, delivered in record time which have made our banking system stronger and protected European tax payers.
But if we are to complete our regulatory framework, there is still work to do.
First, all Member States need to implement the Bank Recovery and Resolution Directive in full. This is an essential part of the Single Rule Book on which the Banking Union rests. A common backstop needs to be agreed for the Single Resolution Fund in case an emergency arises that exceeds the fund's capacity. More immediately, we need a bridge financing mechanism for the fund while it is being built up. And Member States also need to transpose the Deposit Guarantee Scheme (DGS) Directive, guaranteeing up to 100 000 euro per depositor per bank.
I will be keeping the pressure up on Member States to live up to their commitments in these areas. And before the end of the year, the Commission will table a proposal for a European Deposit Insurance Scheme. In the original proposal for the Banking Union it was always intended that there would be a third leg - a mutualised deposit insurance scheme. So this is what you might call unfinished business. This new proposal will, however, be different from the previous one. It will be based initially on a reinsurance approach and will build on Member States’ existing schemes. It will supplement national deposit guarantee schemes and provide funding when national schemes are unable to handle large local shocks. This will help break the link between banks and national governments, and reduce the risk of instability across the Banking Union.
This November doesn't just see the SSM's first anniversary. It is also the first anniversary of President Juncker's Commission. How have we been getting on over the last year?
We deliberately set about doing things differently. We have been working to legislate less and legislate better. In 2015, we only brought forward one fifth of the legislation that was typical in work programmes of an average year under the previous Commission. Frans Timmermans announced last week that next year we would introduce even less new legislation - demonstrating that this year wasn't a flash in the pan. And in my own area of financial services you can expect to see less new rule making and a period of greater stability.
Everything we do is approached with the priority of jobs and growth in mind. So within months of coming into office we launched €315 billion plan to support investment. We've pressed ahead with free trade agreements, not just with America but also with Vietnam, Canada, Japan and New Zealand. And above all, we're pushing to unlock the single market's full potential. We have set out a clear plan for this and launched three single market projects: in energy, in the digital economy and in my own area of capital markets. Bigger markets, more competition and more trade are at the heart of our approach.
The EU is now growing and recovering, with 27 out of 28 countries set to grow this year. That's good news, but we can't lose sight of the bigger picture.
Global growth is forecast to be lower than in 2014. The EU is growing, but not fast enough. Just over 23 million people are out of work, one in five of whom is under 25. We have an ageing population with increasingly fewer people in work to support it. Growth in emerging and developing economies - important export markets - is expected to slow for the fifth year in a row.
Given these challenges, I believe we have to work hard to get the balance right in the financial sector between managing risk and encouraging growth. How we reconcile micro with macro considerations is crucial. I very much agree with Mrs. Nouy that "micro-prudential supervision needs to be complemented by a macro-prudential perspective".
We have written rules to make bank balance sheets more robust. Now it's important we focus on the big risks that might be missed at micro level. Given Europe's growth challenge, we need to make sure that our rules have not had any unintended consequences.
A lesson of the crisis is that we had supervisors focused on narrow areas of financial activity. There was too little attention paid to how all these sectors were interlinked. Indeed, this is why we set up the European Systemic Risk Board: to focus on the collective behaviour of financial institutions; the potential knock-on effects between them; and how the financial sector can influence and be influenced by the wider economy.
In good times we need the overview - the macro view - to lean against the wind, to question prevailing trends, and prevent the build-up of systemic risk. In more challenging economic times, like the ones we now face, the opposite is true.
Everyone agrees financial stability is a prerequisite for sustainable growth. But it is also true that you cannot have financial stability on a sustainable basis without growth. The lack of strong growth is itself the biggest threat to long term stability in the EU.
So yes, we need to strike the right balance between managing risk and enabling investment. That does not mean weakening the framework, the architecture, that has made our financial system stronger and more resilient. What it does mean is that we should take a step back and look at our rules in the round to make sure that when you join up all the dots, that their combined effect does not impede growth.
Seven years after the collapse of Lehman Brothers, I think it is therefore reasonable to ask whether our key assumptions about financial behaviour and economic growth have materialised. Did we expect the level of growth we're currently experiencing? Did we expect banks to withdraw from market making activity rather than re-price it?
That's why I have launched a call for evidence that will run until the end of this year on the cumulative impact of rules in the financial services sector. Regulatory consistency, coherence and certainty are key factors for investor decision-making. If hard evidence shows there are unnecessary regulatory burdens that damage our ability to invest, if there are duplications and inconsistencies, we should be ready to change things.
Separate from this exercise, we have already launched a review into the effect of the CRR. I want to examine how these changes have affected banks’ ability to lend to businesses, infrastructure development, and other long-term investment projects. In particular, I would like know how all the recent changes have affected banks' ability to support local businesses.
As you know, building on the work of the European Central Bank and with advice from the European Banking Authority,we are also working to relaunch European securitisation markets as one of the early measures of the Capital Markets Union. We are doing this to help diversify funding sources, free up bank lending for the wider economy and increase the amount of credit available.
This is not to encourage a return to the bad old ways which discredited securitisation in the past. What we propose is a new framework to encourage the take-up of simple, transparent and standardised securitisation. This will define a set of criteria and apply lower capital requirements when a securitisation meets those criteria. By providing this clear definition of simple, transparent and standardised securitised products, we can support investor confidence and lighten administrative burdens. If we can rebuild the securitisation market to pre-crisis levels, that would amount to an extra EUR 100 billion of investment for the economy.
We are also looking to support the Juncker Investment Plan by making investment in infrastructure more attractive to institutional investors. We will create an asset class for infrastructure investment and lower capital requirements associated with it by 30%.
These initiatives are just some of the first actions to build a Capital Markets Union. Put simply, CMU aims to connect savings to growth, and broaden the financing options that are available to European businesses so that they can grow and create jobs in Europe.
A more diversified financial system will also help us to handle financial crises better in the future. An economy that is heavily dependent on bank funding - as Europe has traditionally been - will be hit hard if there is a contraction in that sector. That is of course exactly what we have seen in the EU in recent years. A well regulated Capital Markets Union will mean better cross-border risk sharing via capital markets. It will help diversify funding sources for financial market participants across all EU countries and increase financial stability in the EU as a whole. I have been very encouraged by the support I have had for it in all 28 member states and in the European Parliament - both for the short-term priorities and for the longer term ambition.
Today is a good opportunity to look back and reflect on the progress that has been made with the Banking Union in the past year. But it is also a good opportunity to look forward and think about the challenges that remain. What further steps do we need to take to strengthen the Banking Union? How are the SSM and the ESRB working as we had hoped - and I will be reviewing the operation of both next year. Have we got the balance right between micro and macro prudential regulation? Do we have rules in place which support growth and financial stability? How can we build a Capital Markets Union that will increase funding for European businesses and help spread financial risk?
Over the coming year, we have action planned in all these areas. We have strong foundations on which to build. My task now is to build a stronger and deeper single market for capital, to strengthen banking union, to build a more resilient banking sector to maintain financial stability and to support growth across the whole EU. I look forward to reporting back on our joint second anniversary next year.