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Vice President of the European Commission responsible for Competition Policy
Banking sector and State aid
Economist Conferences: “The third Future of Banking Summit”
Paris, 24 January 2012
Ladies and Gentlemen:
I would like to thank the organisers for giving me the opportunity to share with you my views on the outlook for the financial sector.
I will do so from the point of view afforded by my present position. My duties as European Commissioner for Competition include overseeing the conditions under which EU governments finance the rescue and restructuring of Europe’s banks. In particular, in these difficult times.
Let's start with the size of the public support to the financial sector since the crisis precipitated in 2008. According to our figures, during this period EU governments have used a total of €1.6 trillion to rescue their banks. Around three quarters of the total amount were guarantees, and the rest was given as public capital injections and treatment of impaired assets.
This extraordinarily large rescue package – equivalent to 13% of the Union’s GDP, 10% in guarantees – can only be understood as a necessary step for the stability of our banking and payment systems – and in this respect it has worked well.
But, on the other hand, this huge transfer of public resources effectively moved risk from banks’ books to governments’ accounts, tightening the links between them.
As you know, the outlay has also strained public finances in some countries, adding to existing causes of stress.
In one extreme case – that of Ireland – the distress of a few banks forced the country to negotiate a programme of financial support with the EU and the IMF.
The financial position of a number of banks and the sustainability of the public finances in some members of the euro area are interconnected, making the search for an effective and lasting solution more difficult.
If the link had been limited to the real and contingent exposure of public finances to rescued banks, the crisis would have been easier to manage.
In that case, the right cure would have been a deep and decisive restructuring of banks, taking into account the cost to governments.
However, as we know all too well, things are much more complicated. In particular, Europe’s sovereign-debt crisis is not only the product of the difficulties observed by the banking sector.
We need to consider other factors as well, such as:
Eventually, this unpalatable recipe has resulted in a confidence crisis that has recently focussed on sovereign signatures.
Investors no longer perceive sovereign bonds as virtually free of risk, and this means that no measure addressing the banking sector alone will bring a lasting solution to the current crisis.
Ladies and Gentlemen:
Following this line of argument, I can see two main factors that will determine the future of European banks:
Let me start with the first factor.
The European Commission is directly involved in the restructuring of the banks that have received State support.
Using the special crisis rules for State aid to banks introduced at the end of 2008, we have so far taken 39 decisions on restructuring, and 24 more banks are under restructuring processes as we speak.
The Commission has also approved national schemes in 20 EU countries. These schemes use an array of tools provided under the crisis regime; including capital injections, support for the divestment of impaired assets, and guarantees on banks’ liabilities.
Therefore, we are using State aid control to maintain a level playing field in the market and, at the same time, to foster the restructuring of banks.
The conditionalities we imposed under these rules pursue three main goals:
The Commission is acting as a de facto crisis-management and resolution authority at EU level, working to address the structural problems that had been affecting many banks well before the crisis.
We are asking some banks to move away from unsustainable business models based on excessive leverage and an over-reliance on short-term wholesale funding.
To give you a few examples: this has resulted in the deep restructuring and the partial resolution of banks such as Hypo Real Estate, Kommunalkredit, and Northern Rock.
The unsustainable business model adopted by some German Landesbanken has resulted – in cases such as LBBW and HSH – in the re-focussing on their core business.
In the case of WestLB – whose viability could not be restored – the result was an orderly resolution.
In other occasions, governments have had to take over the burden of wrong business decisions adopted by systemically important banks.
In these cases, we have requested a downsizing and the significant simplification of banking structures, such as with ING and Commerzbank.
Other banks could not manage on their own due to inadequate governance and to the weight of inflated real-estate assets following the bursting of a property bubble.
We are also asking banks to pay back the aid received in exchange for government support. This condition addresses the moral-hazard issue and limits the cost to the taxpayer.
This latest condition is crucial for the social fairness of the public support of banks; and is particularly convenient for finance ministers now that many EU governments need to put public accounts in order and are asking the people to tighten their belts.
Significant restructuring efforts will have to continue in the future. We can report good progress in some countries – such as Ireland; but in others – such as Greece – the situation is still very complex, given the lack of sustainable solutions to this country’s challenges.
I can also tell you that we are still looking for adequate solutions for some banks in Portugal, Austria, Germany, Spain, Belgium, France and other countries as well.
The case that first comes to mind in France is Dexia’s. The sovereign-debt crisis exposed the structural weaknesses of this bank’s business model; which was exacerbated by the inadequate implementation of the original restructuring plan agreed with the Commission.
Another example is from Spain. State aid in my native country is being used not only to rescue individual banks, but also to help restructure the entire sector of savings banks – or Cajas – transforming them into ordinary banks.
With the objective to manage the legacy of the collapse of the property market and to improve governance, the sector is being overhauled.
In general, our work with banks in distress follows one beacon; we want to give Europe a leaner, cleaner and healthier banking system centred on the financing of the real economy.
As I have said several times in the past, we can no longer afford zombie banks as we struggle to generate growth.
And to achieve this goal, we need to use the instruments of State aid control to protect taxpayers’ interests.
I will now turn to my second point; the complex relation between the banking crisis and the sovereign-debt crisis.
To put it simply, governments and private banks are aggravating each other’s financial stress.
In 2012 many banks – including those which have not yet received state support – will have to make restructuring efforts to comply with the EBA requirement of holding 9% of the highest quality capital after marking their sovereign-debt exposures to market.
This is part of the comprehensive plan which EU national leaders adopted last October to address the consequences of the sovereign-debt crisis.
The best option is that banks will go to the market or draw on their own resources to reach their capital targets; but some may turn to government support as a last resort.
According to our rules, the banks that will eventually turn to the State for recapitalisation or impaired asset protection will have to submit a restructuring plan to the Commission.
It goes without saying that we will not request a radical restructuring in all cases. We will give a proportionate assessment to each individual plan depending on its specific elements.
Let me give you some of the factors that we will consider in our assessment. When studying a case, we will verify:
When we find positive answers to questions like these, we will likely not require further divestments and balance-sheet reductions; instead, we may simply ask for a package of behavioural constraints.
If, however, our assessment reveals that a bank needs to radically change its business model, we will continue to request a fully fledged restructuring.
We will carry out this work under the special State aid rules for banks, which I was forced to extend after the sovereign-debt crisis worsened last summer.
These rules will continue to function as restructuring, resolution and coordination tools for State aid to the banking sector in the EU.
When the situation stabilises, I will propose a more permanent set of State aid rules for banks, consistent with the future crisis-resolution regime that the Commission will introduce using its regulatory powers.
Ladies and Gentlemen:
So far, I have been talking about restructuring plans, which are mainly the responsibility of bankers.
Now, I would like to say a few words on the sovereign-debt crisis and on what we need to do to find a permanent solution to it – and this is a responsibility of Europe’s political leaders.
I look forward to gauge the impact of the decisions taken over the past few months, which have finally started to address the root causes of the crisis.
A sweeping reform of the governance of the euro area has been launched. The so-called Six Pack will allow the European institutions to monitor national budgets and impose sanctions on countries that fail to correct their imbalances.
Thanks to these new measures, the surveillance now goes beyond deficit thresholds to cover the stock of debt and restructuring measures for the economy.
In addition, last November the Commission proposed new measures that would put strict limits to fiscal deficits and would give the European institutions new powers to examine the processes that lead to national budgets. These measures are on the table of today’s ECOFIN for a first round of discussions.
Finally, next week the Heads of State and Government of the EMU and of some other countries will probably adopt a new inter-governmental agreement. The text will add more rules and stricter commitments to those that are being agreed under the EU Treaty.
All these important reforms are certainly necessary; and I hope that they will be sufficient as well, but on a condition.
These measures will manage to pull us on safe ground if the countries of the EU can show their firm political commitment that they intend to exit from this crisis together.
National authorities and leaders must do all it takes to defend the historic achievements of over half a century of integration, starting with the internal market and the euro.
As to the means to achieve this goal, I think that fiscal discipline is only part of the solution. We also need to adjust our internal macroeconomic imbalances and to restructure our economies.
The current period of turbulence should not cloud our vision; even in these difficult times, we have to keep our eyes fixed on medium- and long-term objectives to take the path to sustainable growth.
In this context, the Commission is committed to ensuring that European markets remain fair, efficient and competitive.
We want to achieve higher degrees of openness, competition and transparency in the functioning of financial markets.
And for that purpose we are using our regulatory initiatives – as is the case with the EMIR and MiFID 2 proposals – as well as our competition policy instruments.
In this line, we are intensifying our antitrust scrutiny on wholesale financial markets. For instance, we have already intervened against Standard & Poor’s and Thompson Reuters to limit abuses in the licensing of financial information.
In addition, we are investigating possible abuses of dominant position by investment banks in the markets for CDS clearing and for CDS trade data.
The proposed merger of Deutsche Börse and the New York Stock Exchange is being analysed with these considerations in mind.
The College of Commissioners will take a decision on this merger in a few days and it will be an important one, because exchanges are the lifeblood of our economies.
Trading and post-trading activities, for cash or derivatives, are essential for our companies and investors to be competitive at EU and global level.
Preserving competition in this domain is of utmost importance and we will live up to our responsibilities in this regard.
At the end of the day, improving our economic performance is the surest way to leave this crisis behind.
Let me conclude.
2012 will be a critical year for our economies, for Europe’s banks, and for finding a comprehensive solution to the sovereign-debt crisis.
The restructuring of banks which benefit from State support will continue to be one of my top priorities, to make sure that they return to long-term viability and – when this turns out to be impossible – that they make an orderly exit from the market.
As to the sovereign-debt crisis, the EU – and the euro area leaders in particular – urgently need to find a consensus on closer economic and fiscal integration, as a pre-requisite for a smooth and growth-friendly functioning of the EMU and a successful completion of our internal market.
Cooperation and integration have been the traditional response to our crises in the past and the main factor of our success.
If we are serious about giving the euro a better structure of governance, we have to accept a higher level of economic integration.
Once again, we need more Europe to get out of this crisis. If we do, we will be stronger than when we entered into it.