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European Commission

Michel BARNIER

Member of the European Commission, responsible for Internal Market and Services

Financial regulation: laying sound foundations for stability and growth in Europe

Economic Ideas Forum

Helsinki, 7 June 2013

Ladies and gentlemen,

Let me first thank the Centre for European Studies, its President Wilfried MARTENS and its Director Tomi HUHTANEN for giving me the floor today.

This panel is entitled “Banking sector, finance and regulation: a strong pillar for the real economy”.

But as I see it, financial regulation is not just a pillar. It is the entire foundation for the recovery of our economy. There are two reasons for this:

Firstly, we need financial regulation to restore stability. And protect workers and taxpayers from another financial crisis.

And secondly, we also need financial regulation to spark growth. By ensuring that households, SMEs and local authorities get the financing they need.

The challenge here is to achieve stability and growth at the same time.

This raises three questions:

Can we transform the financial sector in a smooth way? And avoid the bumpy ride that we had in Cyprus?

Can we achieve stability without hampering growth?

Can regulation even actively contribute to fostering new investments? And plant the seeds for new growth in Europe?

I think the answer to these three questions is yes. But let me come back to each of them.

I – First, can we transform the financial sector in a smooth way?

On financial regulation, we have made huge progress in the latest weeks.

We have found a final agreement on our CRD IV package. It will make EU banks more solid. And strengthen their capacity to absorb potential losses.

It is a major piece of the single rulebook that we are putting in place for all 27 EU Member States.

However, Eurozone countries clearly need to go further. In a common currency, negative spirals between failing banks and ailing sovereigns are a matter of common concern.

We cannot have a genuine Economic and Monetary Union without a Banking Union.

We have reached a major milestone with the agreement on a single supervisory mechanism for banks.

More than 6,000 banks will be subject to high-quality, harmonised and coordinated supervision by the ECB.

This will open the possibility for the European Stability Mechanism to recapitalise ailing banks. And break the link between banks and sovereigns.

However, we have yet not reached the end of the road.

As we have witnessed in Cyprus, we need transparent and clearly defined resolution procedures for banks.

There are two steps to achieve that:

First, we need rules on bank recovery and resolution that are common to the whole EU.

This is critical since most European banks have branches and subsidiaries in other EU countries.

So we need common rules:

  1. to establish a clear order of claim in case resolution becomes necessary - shareholders, creditors and all other parties need to know in advance what to expect;

  2. while making sure that deposits under 100,000 Euros stay protected.

That is the purpose of the Directive on Bank recovery and resolution. I hope it will be adopted in the next few days

Second, for countries belonging to the Banking Union, we need to establish a common resolution fund. With one centralised resolution authority.

We will propose a Single Resolution Mechanism this summer.

This will considerably reinforce stability.

II – But the second question is: can we achieve stability without hampering growth?

The scale of reforms in such a short time frame is unprecedented. Fears and reluctance on the part of some financial institutions is understandable.

But let us not forget that it is the lack, not the excess, of regulation which pushed Europe into the worst crisis in its history.

Besides, avoiding negative impacts on growth is our top priority.

For example, our CRD IV proposal has been carefully fine-tuned to avoid banks reducing their lending to the real economy. In particular to SMEs, which are highly dependent on bank financing.

We are also carefully assessing the need and the nature of reforms of the structure of the banking sector. Our goal, following Erkki LIIKANEN’s report, is to identify and to address any outstanding systemic risks.

III – Finally, can regulation even actively contribute to fostering new investments and growth?

New capital requirements, supervision and resolution will bring back financial stability.

But this is not sufficient to restore what Europe needs most: innovation, competitive industries, modern infrastructures and green growth.

To achieve this, we need long-term investment.

Fortunately, we have strong assets in Europe – Including high levels of private savings and foreign investment.

Yet many factors are holding back long-term investment. These include:

  1. general corporate risk aversion;

  2. a lack of confidence of both savers and investors; and

  3. scaled back bank lending to the real economy.

We need to change this situation.

Banks will continue to play an important financing role in Europe. But we need to ensure a more diversified system.

First, we need greater involvement of institutional investors. Such as insurance companies, pension funds or development banks. As a complement to commercial banks

Second, we need more direct capital market financing. Our revised MiFID Directive will, once adopted, strengthen capital markets. We must also think of ways to develop bond markets in Europe as an alternative to bank loans. And ask ourselves how to revive the securitisation market. Without compromising financial stability.

Third, we need to look at cross-cutting factors to encourage long-term saving and financing. Like tax incentives for long-term investment. Or specific saving tools at the EU level.

Last but not least, we need to facilitate SMEs’ access to financing. European venture capital funds will help to raise capital from investors and support start-ups all over Europe. We need to find other ideas like this one.

On these four key issues, our Green Paper on long-term financing has launched a public debate. I encourage all of you to participate in our public consultation.

It is by working together that we will find the best ways of encouraging long-term investment.

And that we will ensure that the new financial regulation will not only restore stability and avoid the next crisis but also foster growth in a proactive way.

Thank you.


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