Other available languages: none
[Check Against Delivery]
Vice-President of the European Commission, responsible for Internal Market and Services
Attack to win games and defend to win trophies: safeguarding financial stability in the EU single market
Speech at the Worshipful Company of World Traders
London, 29 September 2014
Good afternoon ladies and gentlemen.
I would like to thank the Master of the Worshipful Company of World Traders, Heather McLaughlin for inviting me here today.
My thanks also go to Lord Mayor Fiona Woolf for her kind introduction and insightful words on the relationship between the City of London and the European Union at this time of considerable change.
I am delighted to have the opportunity to address you.
When I was made a European Commissioner, my first visit abroad was to London. And today marks my last visit as my term in office comes to an end in a few weeks.
I know that there was a fair degree of suspicion here in the City when I was first appointed to oversee European financial regulation. One newspaper headline - which I will never forget - called me "the most dangerous man in Europe"! But it's safe to say that our relations have improved over the last five years.
I have had excellent working relationships with nearly all my interlocutors from the UK, from the Treasury to the Bank of England and from the Financial Conduct Authority to the UK's representatives in Brussels. There have of course been some more difficult times, but that is also only to be expected.
I have also had the privilege to work with some extremely talented Brits. Sharon Bowles, for instance, who until recently chaired the Economic and Monetary Affairs Committee in the European Parliament. Jonathan Faull who has led my department with tireless energy and dedication. And I should also mention Malcolm Harbour who chaired the Internal Market Committee with great competence.
Now I pass the baton to a new European Commissioner - from the UK. I trust that Jonathan Hill will be endorsed after his hearing in the European Parliament this Wednesday. He too has been unfairly criticised simply because of his nationality. I am certain that, like all 27 of his future Commission colleagues, he will draw on his skills and experience to serve the general interest of Europe’s people and businesses in a challenging global context.
2. Period of transition
I am leaving the European Commission after a turbulent few years. I am referring of course to the financial crisis that spread and became an economic crisis, particularly in the euro area, which in turn led to a social crisis and massive unemployment, not to mention the political consequences with the rise of populism and protectionism. We have had to address the root causes which led to the near-collapse of the financial system and the weaknesses in the single currency. This has been essential; not only for countries within the euro area but for all 28 EU nations.
We have created an entirely new set of rules governing the financial sector. We have implemented the G20 agenda so that every market, every financial player and every activity is well regulated and effectively supervised.
We have insisted that banks hold more and better capital, that they strengthen their risk governance and that they curtail the excesses of the past.
We have improved how financial markets operate and made infrastructures like central securities depositaries more stable and more resilient.
We set up three new supervisory authorities, which are now fully operational and include the European Banking Authority here in London, to make sure banks, markets and insurance companies have the same rules and are supervised adequately and in a similar way across the EU.
And we are about to witness the birth of the Banking Union; probably the biggest European project since the creation of the euro itself.
The Banking Union will ensure the stability of the banking system in the euro area, to the benefit of the wider EU single market. And I should add this is precisely why George Osborne gave his support to the Banking Union.
And, vitally, it will ensure that taxpayers are no longer in the front line to pay for failing banks.
3. Finance at the service of the economy
Ladies and gentlemen, we can collectively be proud of what has been achieved to regulate the financial sector better; to return public finances to a more stable footing; and to improve the governance of the euro area. We are approaching the end of an intense period of rule-making. The bulk of the necessary reforms have been agreed and we are entering into an implementation phase. When it will be essential to make sure that the rules that were so carefully drafted and painstakingly agreed are put into practice. That they effect real change for the better. Setting the rules was only the first half of the game, enforcing them is the vital second half. There is no time for self-satisfaction.
The priority now has to be to make sure the financial system does what it was intended to do. That is to say, keep the economy running and get finance to where it is needed – to businesses, Europe's entrepreneurs and SMEs, and households.
Policymakers and the financial industry have a moral imperative now to make this happen. Nobody should be spending millions on advisors’ fees just to find loopholes so that "business as usual" can continue. Society demands more of us than that. There is no "business as usual"; enhanced supervision and regulation is the "new normal".
3.1: Long-term financing/ Capital Markets Union
Part of the old order that we need to shake up is Europe's – including the UK's – over-reliance on bank funding. Firms in Europe rely on bank funding for approximately 85% of their funding needs, with the remainder coming from the capital markets. In the US the split is 45/55. Banks will continue to play a vital role. And they are getting healthier, which is essential for them to lend to the real economy.
But it is also necessary to tap additional sources of funding, in particular to meet the funding needs of SMEs. We need to further develop and better integrate capital markets in the EU, reduce the cost of raising capital; help translate greater financial stability into financing economic growth; and make Europe a more attractive place to invest.
I think this is what Commission President-Elect Juncker meant by a Capital Markets Union. Reducing fragmentation in the capital markets. One of the next great frontiers of getting finance to where it is needed most, that is to say financing investments for our future. This means that a project should be financed according to its risks and not depending on its location.
One example is securitisation. We need to re-start this market, which allows banks to share risks, thus freeing resources for new lending. It can provide an attractive product for investors. European securitisation was already relatively safe, including in the run-up to the crisis, but it was hit because of a lack of confidence in securitised products in other jurisdictions.
To re-start this market we need to put in place criteria for simple, transparent and safe securitisation. To this end, important work is ongoing both at the European and international levels.
4. Potential risks in the system
Ladies and gentlemen, regulating and supervising the financial system is not a sprint. It is a race that never really ends, as regulators and supervisors must remain vigilant. We can never afford to become complacent.
We need to be sure to identify and manage potential risks in the system. There are a number of issues that weren't on the agenda when I took office. And while of course we made every effort to “future proof” our financial reforms, we can't overlook the fact that new tensions have arisen. Some may be due to unintended consequences of our new rules. Some may be due to how rules are being applied. Some stem from the way the financial system will transform itself, also through innovation. And some have their source in the wider economy. Regardless of where they come from, we have to be ready to change tactics and alter our pace to face these threats.
Let me now talk to you about what we still need to do:
Number 1: Shadow banking
There is potential for risk in the expansion of the shadow banking sector. The traditional banking system is now subject to tougher rules. We do not want to have a situation whereby risky activities simply move outside the regulated sector, and systemic risk goes unchecked.
Non-bank intermediaries and market-based finance have a useful role to play in financing the European economy, so it is not our intention to choke all of that off, but we want to ensure that potential dangers are monitored and due safeguards are in place.
A necessary next step would be to make progress on the proposal on regulating money market funds that I put forward last year. And to agree on our proposed rules on the transparency of securities financing transactions.
Number 2: Too big to fail
Another piece of “unfinished business” is how we deal with banks that are too big to fail, too costly to save and too complex to resolve. The financial reforms have done a lot to reduce systemic banking risk and limit the need for states to prop them up to maintain financial stability. But certain complex, important and heavily interconnected banks may still be problematic.
The Commission put forward a draft law earlier this year to address the issue. It would limit the potential for banks to expand their balance sheets through proprietary trading and, in certain cases, to separate trading from a bank’s deposit taking and commercial lending activities. The objective of the proposal is the same as the Vickers reform here in the UK. I strongly encourage Member States and the European Parliament to concentrate on this proposal. Because I don’t think our citizens would forgive us if we left an important source of potential systemic risk unchecked.
Number 3: Too big to fail central counterparties
Banks are not the only ones that can be too big and too interconnected to fail. Central counterparties also pose a significant risk. We have strengthened the role of these CCPs in our legislation and they will become more and more important. Around € 500 trillion of global risk is centralised in a handful of global CCPs, some of which are located in the EU. If one of these CCPs were to fail, the consequences would outstrip that of even the biggest bank in Europe. More importantly, the ripple effects would be felt worldwide.
My staff are currently looking at how such institutions could be resolved safely.
Number 4: Lack of international consistency in implementation of agreed rules.
CCPs and derivatives trading are just one example of our globally interconnected financial system. One in which it is absolutely vital that the rules applied in one jurisdiction are compatible with those applied elsewhere.
In the aftermath of the financial crisis, the EU, the US and other jurisdictions realised that there had to be a global response to this global crisis. And we put the G20 in the driving seat of the international financial reform.
Since then, we have all carried out ambitious reforms. No more so than in the EU and the US.
Now our challenge is in making these rules - that seek to achieve the same objectives – work together. So that there are no gaps; no regulatory arbitrage; no race to the bottom. But equally, no overlaps, no duplicative requirements that handicap and confuse our companies and could drive them out of our markets.
Regulators around the world agree that global convergence and deference to other jurisdictions are the way forward. But these words have to be turned into action. Global regulators must cooperate, trust and rely on each other.
Now that the rules are on the statute books, we need to deliver on implementation. How rules work in practice on the ground. They must be applied in a consistent and coherent way.
That is the only way to reap the benefits of the global reform agenda. And to have efficient financial markets that support growth and jobs.
I mentioned derivatives earlier. The EU and the US reached an outline agreement in July last year on how our respective rules should work together. We now need to finalise that work. And both sides need to be willing to deliver here.
Another area where the cross-border angle needs to be taken into account is bank resolution. What happens if a bank that is active in multiple markets needs to be wound down? We need a strong cooperation framework between regulators to manage such a situation.
Let me now focus on macro-economic risks
Looking back at the 2007-8 financial crisis, it is clear that it was not caused only by insufficient regulation and supervision. It was also due to macro-economic factors like account imbalances and too much liquidity in the financial sector that led to mis-pricing of risk. Some macro-economic imbalances are still in place today and could present real threats to our fragile recovery in Europe.
The first macro-economic issue is that of our growth level. Or rather, the lack of it. The EU as a whole is due to grow at around 1.6% this year. A lack of demand more than insufficient supply from the financial sector seems the main problem in the EU's market at present.
And the overall figure hides strong disparities between Member States, with some still in recession. This is having a big impact on banks due to non-performing loans. Which raises financial stability concerns, which are being addressed through the Asset Quality Review and the Stress Testing, carried out by the ECB and EBA.
We also have a situation in which public debt levels have increased. This is one issue dealt with in the Commission’s country-specific recommendations to Member States. Each country has to take responsibility for getting its own house in order, while staying within the boundaries of the EU treaties.
I believe the only solution is to stimulate both demand and supply. Accommodative fiscal policies will only help if countries continue to reform to improve their competitiveness, and not least in my own home country!
Along with the low level of growth, we have the extremely low interest rate environment. When interest rates are low, people and companies with debts find it easier to repay them, which is positive. But on the other hand investors and savers have to look further for a return, which may lead them to take on excessive risks.
The situation may be particularly difficult for life insurance and pension providers, many of whom cannot get the yield they need to balance their payouts to policy holders.
A further consequence of low interest rates is that it creates upward pressure on the prices of certain assets. Particularly real estate. This is obvious here in London.
As we all know, property price bubbles were one of the key drivers of the last financial crisis. Responsible authorities will have to monitor the markets very closely and use all the tools that the reforms have equipped them with to prevent future problems.
5. UK’s important role
Ladies and gentlemen, we have to be realistic about the challenges we still face. That does not mean being pessimistic about the future. But we need to be determined and use all the tools we have at our disposal. And stand united in doing so.
The UK has a vital role to play here.
The UK is not only home to the most important financial centre in the EU. It is also one of the strongest defenders of the single market. And is committed to building strong, mutually beneficial relations with our international partners.
Scotland has voted to stay in the UK. It has also voted to stay in the EU. I welcome that.
Your country continues to have a vital role to play as Europe faces a new economic reality.
And yes, there are tensions. Yes, there are differing views. But no more so than in any vibrant democracy. And you in the UK know all about managing differences inside your own union!
The important thing is that those tensions are acknowledged and dealt with. For instance, there are concerns about how the Banking Union will be governed.
The Banking Union also raises fears of non-euro countries being excluded or side-lined. We have put safeguards in place to address those fears. Notably preserving EBA's role and in relation to voting arrangements in EBA. But we need to be vigilant in keeping that delicate balance between the interests of countries both inside and outside of the euro area. And we have seen recently that the two central banks do work together, so concerns should not be overplayed.
The European Commission has no interest in undermining the UK. And no interest in threatening London’s place as the largest European financial centre. We want to strengthen and integrate the single market, not weaken it. And that won’t change in the coming years.
Not least as we develop more integrated capital markets. Given the UK’s position as home to Europe’s largest capital market, it is obvious that it should play in a central position in this game. One which should help to maximise the benefits of capital markets and non-bank funding for the real economy. This will be one very important project that my successor will want to drive forward.
Lord Mayor Woolf, ladies and gentlemen, we find ourselves at a turning point. Not only is this a time of institutional and political change everywhere in Europe. We are entering the second half of the game. We have survived the worst financial and economic crisis in living memory. We have saved the euro, which many thought was not going to be possible. We have created radical new rules that address many of the shortcomings that led to the crisis. And we have started a new era of international regulatory cooperation.
But this was only the first half. Hard and detailed work now has to be done to ensure that the rules we have agreed on are applied in full. That new arrangements for regulatory cooperation work well. And that money gets back to where it is needed most – in our households and companies.
There is a saying in sporting circles that you need to “attack to win games and defend to win trophies”. We have attacked through the overhaul of the financial framework of the last five years. Now we need to defend what we have achieved by remaining alert to new and potential risks. Adapt to changing circumstances. And play as a team to win the global competition.