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European Commission

Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

UBS European Conference 2013

UBS European Conference 2013

London, 12 November 2013

Ladies and Gentlemen:

Banking and the financial sector have come under increased scrutiny over the past few years. The public opinion and the media are concerned that financial markets are still too complex and opaque and that they may yet pose risks to the economy. Policymakers and regulators are making a big effort to respond to these concerns. Their action is determining significant changes in the financial industry. But this is not only about changes in how finance works.

The way banking and finance evolves will have a significant impact on Europe’s process of integration, on the performance of our economies, and on the wellbeing of our societies.

This is why I welcome every opportunity to join the public debate about these issues. This year’s UBS European Conference is one such opportunity, and I want to thank Mr Ermotti for inviting me to open it.

State of play

Strengthening regulation in the financial services and shaping a completely new European prudential supervisory architecture are among our main efforts.

Since 2010, the Commission has proposed nearly 30 sets of rules to ensure that all financial actors, products and markets are properly regulated and supervised.

The main reforms – already approved or in the process of being approved – include reforms to improve the stability of the banking system through stronger prudential and liquidity requirements.

Specific measure under these headings include the adoption of the CRD IV package, the framework for crisis management–called the Bank Recovery and Resolution Directive –and the proposal to harmonise national deposit guarantee schemes.

Other important measures have been taken to strengthen the regulation of financial markets and infrastructure.

This includes the adoption of EMIR – which is about the trading and clearing of derivatives on well-regulated and transparent platforms– MIFID II and MIFIR, which will enhance the framework for securities markets, as well as the proposals on investment funds and insurance products.

We have also adapted our supervisory architecture with the creation of the three new European supervisory authorities – EBA, ESMA and CEIOPS – and the establishment of the European Systemic Risk Board.

Banking Union

These regulatory initiatives are designed to underpin the functioning of the financial internal market in the whole of the EU.

However, they do not fully address the specificities of a monetary union such as the euro area and especially the vicious circle between banks and sovereigns.

To tackle the specific challenges of the EMU, the heads of state and government launched in June last year the Banking Union project, which aims to establish a single supervisory mechanism and a single resolution mechanism with a single resolution fund.

The project is designed for banks in the euro area, but it is also open to countries that decide to join it even before they become members of the EMU.

Its main objectives are simply stated:

  • Breaking the vicious circle between banks and sovereigns and reinforcing the economic and monetary union;

  • Guaranteeing that the EU banking system stays in good shape; and

  • Restoring normal and even lending conditions to the economy throughout the Single Market.

Progress in setting up the three pillars of the Banking Union is uneven. Whereas the single supervisor will be fully operational next year; the resolution mechanism and its resolution fund are still the object of difficult debates among the members of the euro area.

Single Supervisory Mechanism and ECB Comprehensive Assessment

The role of the Single Supervisory Mechanism has been attributed to the European Central Bank.

As of November 2014, the ECB will directly supervise some 130 large banks in the euro area, equivalent to about 85% of the area’s banking system.

To prepare for its new task, the ECB is starting this month a comprehensive assessment which will conclude in October 2014.

The assessment will consist of three elements:

  • a supervisory risk assessment to review the key risks a bank is facing;

  • an asset quality review to enhance the transparency of bank exposures; and

  • a stress test to examine the resilience of banks' balance sheet to stress scenarios.

When the comprehensive assessment is over, a year from now, we will have a detailed and independent picture of all significant banks in the euro area.

The exercise will also bring broader benefits in the process. The transparency and the changes it will promote across the sector over the next months will boost confidence in the stability and future prospects of the euro-area economy.

Single Resolution Mechanism: where are we heading?

The Commission proposal on the Single Resolution Mechanism – like the Directive on Bank Recovery and Resolution for the EU-28 – is being discussed in Parliament and Council and is slated to come into effect in 2015.

In essence, the mechanism would use the same tools as the Recovery and Resolution Directive. The main difference is that a single euro area body – rather than 28 national authorities – will decide how to resolve a bank.

Negotiations are still on-going and we don’t know for sure the shape the mechanism will take eventually. But let me explain how it should work according to the proposal tabled by the European Commission last July.

A Single Resolution Board would prepare and carry out the resolution of the bank flagged as failing or likely to fail by the ECB in its role as single supervisor. The Single Resolution Board would also control the EU single fund set up with contributions from the banking sector.

Based on the proposal of the Single Resolution Board, the European Commission would decide if and when to place a bank into resolution. This will safeguard the independence and accountability of the overall mechanism.

Completion of the Banking Union is urgently needed. However, there are many unresolved questions on the table. Let me highlight a few of them:

  • Who is going to be ultimately responsible for the resolution of a failing bank?

  • Shall we have a common backstop that the resolution authority can use?

  • Above all, have we lost the sense of urgency of June 2012, when the European Council took a firm commitment to create the Banking Union?

The next few months will be crucial. We need to sustain the timid signs of recovery, and eliminate uncertainties regarding the regulatory and institutional framework of the banking system in a period of important political changes. We will have a new European Parliament in June 2014 and a new Commission by the end of next year.

How the new German coalition government will set up its positions; the new Commission will establish its priorities; and the new Parliament will decide to coordinate with the Council are relevant political questions marks.

The future of our economies and of the EMU, as well as the citizens’ trust in the European institutions, all depend on their ability to find the right answers.

On top of this, there is no time to waste. The timing of these decisions is also strategically crucial. The Banking Union must be fully in place by the end of this mandate.

What the Commission does

If the comprehensive assessment carried out by the ECB is as rigorous and credible as it should, we cannot rule out that national public backstops or the ESM will have to be used again to restructure or resolve more banks.

Here, the way State aid control will function is of great importance.

Over the past five years, we have used State aid rules as a substitute for the lacking resolution authorities in the EU. The Commission has analysed the restructuring of 67 banks equivalent to around one quarter of Europe’s banking sector in terms of assets – and 23 of them had to be resolved.

And the job is not finished. We still have 27 pending cases, in particular in the periphery of the euro-area countries.

The new State aid rules for banks that entered into force in August have been prepared to manage the transition towards the Banking Union, and draw on the insight and expertise we have gained using the old ones for five years.

The new rules introduce three main changes.

Firstly, they reinforce the principle that the banks should share the burden of restructuring, in case of a precautionary recapitalisation as well as in a resolution procedure.

This means that, before asking for public funds, banks should go to the market; use available internal resources; and tap their shareholders, hybrids holders, and junior-debt creditors.

The way the new State aid rules deal with the "bail-in" issue in precautionary recapitalisations has created some debate. Logically, investors want clarity on the backstops that will be used. I fully agree.

Let me clarify our position.

What happens if the comprehensive review carried out by the ECB reveals capital shortfalls? Before a bank tries to have recourse to public backstops, at national or EMU level, burden sharing will be carried out according to the new State aid rules.

This means above all that shareholders and junior creditors will have to contribute to filling the capital gaps that may be revealed by the comprehensive review.

Of course, if financial stability were at risk, the new rules provide for an exception clause. In this exceptional case, public backstops can intervene before “bail-in” takes place. Preserving financial stability has always been a priority for the Commission and all our decisions on individual cases have reflected this concern. Now the exception makes this explicit.

Secondly, before any public money is disbursed, the Commission will have to agree on how the banks’ private resources will be used to fill the capital gaps and how they will be restructured.

Finally, the new rules cap executive pay for all the banks that receive public aid.

Obviously, the new rules are fully consistent with the resolution framework that is taking shape and which will lead to the Banking Union.

Lessons learned

Our experience with banks in distress – in programme countries and elsewhere – allows me to draw some general conclusions. What went wrong with the banks that have asked for public support since 2008?

Problems with funding and liquidity come first by a mile. We have seen many banks in dire straits because of their reckless past policies, especially their over-reliance on wholesale funding.

Second, we’ve learned that there’s no such thing as a safe business model. Even retail and public banks have suffered in the turbulence. In other words, we’ve had ample confirmation that banking is always about the prudent management of risk.

Finally, cross-border banks and dealing with different national authorities have added layers of complexity when it comes to resolving a bank.

Of course, I will not claim that we now know how to predict and prevent all future banking crises. But I can tell you quite confidently that a safer and more solid banking sector needs adequate levels of capitalization, proper risk management, and better governance and supervision.

These are precisely the principles that underpin the Banking Union project.


Ladies and Gentlemen:

Let me conclude with one last remark.

Five years into the crisis, revelations of irresponsible and possibly illegal practices keep emerging in the press.

We are coming across these business practices in a number of cases we are investigating, such as our investigation of a suspected manipulation of the Libor and Euribor benchmarks.

Similar benchmark-manipulation concerns are raised in a case that has just been brought to our attention in the foreign exchange market.

Also, suspected collusion over a reporting process prompted the inspections that we carried out last May at the premises of several companies active – such as the price reporting agency Platts –in providing services to the crude oil, refined oil products and biofuels sectors.

Finally, we are looking into the market for credit default swaps in a case involving large investment banks and leading financial-information providers.

As we observe the first signs of recovery after a long period of recession, we need a different kind of finance to sustain it: safer, more transparent, and focussed on financing the real economy.

I have no doubt that the comprehensive response the EU has given to the financial crisis will take us closer to this goal.

A stronger regulatory framework and the Banking Union will give investors more certainty in the rules of the game; make Europe’s finance more stable; and support its return to growth.

Thank you.

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