Ladies and Gentlemen,
I'm delighted to be here to celebrate the fifth anniversary of the European Banking Authority. It’s a particular pleasure to do so here at the Guildhall, at the heart of the City of London.
From here, Britain has traded with the rest of Europe for centuries. Today, investment flows out from the Square Mile to the four corners of the continent, and financial services – this country’s biggest export - are sold right across the single market. So it’s a good opportunity to think about the rules that govern the single market and the work done by the EBA in the last five years to strengthen the regulation and supervision of Europe’s banking sector.
I would like to start by thanking Andrea Enria and his team for all their hard work. It’s easy today to take for granted what has been achieved. But they have been part of a radical overhaul of Europe's regulatory and supervisory framework for banks, and played an important role in making our system more secure.
The Single Rulebook for the banking sector was at the heart of our response to the crisis. Here the EBA has helped deliver a consistent application across the single market of this new regulatory framework. For this, their standards, guidelines and Q&As have been a great help.
Europe’s banks are now stronger and better capitalised. They hold higher levels of liquidity, and the disclosure of data has gone a long way to restore confidence across the banking sector. Last November, the EBA published detailed information on over a hundred banks from twenty-one countries. The results confirmed that Europe’s banks are increasingly resilient. They also helped shine a light on issues we still need to tackle, such as the non-performing loans that weigh on some parts of our banking sector. This greater transparency, which the EBA has helped bring, is a central part of our response to the financial crisis.
In recent years, we've passed huge pieces of legislation, like the Capital Requirements Regulation and the Bank Resolution and Recovery Directive. We've created a Banking Union, a Single Supervisor and a Single Resolution Authority.
It's been an unprecedented period for new bank legislation. But now, as Mark Carney has said, many of the big reforms have been implemented. There's a sense that the bulk of the work is done. I share that sense. While there is still some unfinished business at the Basel Committee, I want to aim for a period of greater regulatory stability ahead. Businesses need that certainty to be able to plan and invest.
This approach fits into the Commission's broader objective of regulating better and regulating less. This year we will proposed 80% fewer laws than was usual each year under the last Commission. And we're reviewing two and half times as much legislation as in previous years to check whether it is working as intended.
In my own area of financial services, I want us to keep rules as simple as possible. The more complex they are, the more you risk opening up a regulatory arms race and can make it harder for managers to take responsibility which to my mind should be one of our ultimate policy goals. For me, part of good law making is that you have rules that command respect. That means they need to be proportionate, related to risk, and drawn up in way that reflects different business models and sizes. And in striving for financial stability, we also need to remember that lack of growth is one of the biggest threats we now face to financial stability. So I want us to apply rules in a way that takes account of their implications for European businesses.
That's the approach to legislation we will be bringing forward this year to implement the Total Loss Absorbing Capacity requirement. And that's also how I'll be approaching issues like the Net Stable Funding Ratio, NSFR, and on the Leverage Ratio. We have asked for the EBA's advice on both. We're now preparing the ground for preliminary discussions with Member States and the European Parliament. On the basis of these discussions, we will by the end of the year come forward with a proposal on how to apply these rules in a way that makes sense for Europe.
At the same time, we also need to check that the legislation we have already passed is as growth friendly as possible. That is the thinking that lies behind the cumulative impact assessment of the financial services legislation – the call for evidence – that I launched last year.
In recent years, we’ve had to legislate at speed to get the crisis under control. During that time, we introduced forty separate pieces of legislation in Europe. That has made the overall architecture stronger. But when you’re firefighting, it’s impossible to get everything right. Nor is it possible to predict exactly how the rules will interact once they're up and running. So now, as we work to create an environment that supports investment, we need to check that taken together, these rules haven't had any unintended consequences.
The Call for Evidence ended on Monday. We’ve had nearly 300 responses, from twenty member states, and a few from outside the EU. They've come from right across the industry, from 26 public authorities and from end users. Some of the concerns raised are about rules getting in the way of the diversity of the EU financial sector; compliance burdens linked to the duplication of reporting requirements; and unintended consequences like the impact of the rules on lending and market liquidity. So we’re now reviewing the responses, weighing up the evidence, before deciding whether change is needed and how we should go about it. We'll be discussing this with the EP and Council soon and we'll set out our analysis before the summer.
As part of a separate exercise, we are carrying out a review specific to the Capital Requirements Regulation, the CRR.
For me, we need to make sure this regulation and its sister directive CRD4, achieves its prudential objective while imposing the lowest possible administrative burden so that banks can get on with their job of lending to the wider economy. So I want to look at how we can simplify reporting requirements, and costs that are associated with compliance more generally. I want to know whether we can tighten legislation up, correct technical mistakes, and give more certainty to businesses. I'd like to take a more proportionate approach to smaller banks and take a close look at whether it really makes sense to have the same compliance requirements for all banks and all business models.
To encourage investment in infrastructure, I want to look at whether lower capital requirements - like the ones we apply to SME lending – and a better recognition of the risk associated with infrastructure projects, could play a part in improving long term investment. We've sought external advice and asked London Economics provide us with some analysis. And for lending to SMEs, I want to check that the thresholds under which loans can qualify for lower capital requirements are high enough.
Another area we need to look at as part of the CRR Review is additional Pillar 2 requirements. We know that there are differences in how these rules are applied by supervisors. I want to make the rules clearer, so that the legislation can work as it was originally intended.
There needs to be a clear difference between the goals of Pillar 1 requirements that apply to all banks, and Pillar 2 requirements that are bank specific and depend on the level of additional risk that banks bear. This will help us meet our goal of preserving financial stability and supporting banks' competitiveness.
We'll present our recommendations on this and other areas being considered under the CRR Review later this year.
As we take forward our work to make sure we have a legislative framework that supports growth in all 28 member states, we are also working to strengthen the Banking Union.
At the end of last year we came forward with a proposal to put in place a European Deposit Insurance Scheme, EDIS, by 2024 as part of a broader plan to deepen Economic and Monetary Union. Put simply, it aims to give the Banking Union the third leg that was always intended, alongside a single supervisor and a single resolution authority.
The plan is to move from a single system of deposit guarantee schemes to a scheme that will underwrite deposits across the whole Banking Union. Depositors already have the confidence of knowing that their deposits are guaranteed up to €100,000 if their bank goes bust. EDIS, is a Banking Union wide scheme that would make banks better protected if there were larger local shocks.
We want to build it up gradually, until it's fully mutualised by 2024 – and the same level of protection will continue to apply to depositors throughout. It should be cost neutral for the banks because contributions to EDIS would be deducted from what banks pay into their national DGS. And there would be strong safeguards against moral hazard.
Alongside EDIS, we're driving forward a whole range of measures to reduce risk.
We'll start by keeping up the pressure for the full application of legislation we've already agreed. The new resolution framework needs to be fully incorporated into national legislation, and the Deposit Guarantee Scheme directive should also be fully transposed.
We're going to consult on the key differences between insolvency and early-restructuring regimes across the EU. By the end of this year, we will bring forward legislation to address the most important barriers to the free flow of capital, building on national regimes which work well.
We'll also continue our work on national options and discretions. While some are there for a good reason, and are used to take account of specific circumstances in different countries, supervisors need to be able to compare apples with apples. It's important that we avoid differences in rules that stand in the way of competition and trade across the single market.
Despite the challenges we still face, I am in no doubt that the European Banking sector is much stronger today than before the EBA was born five years ago. As we look to finish the work that was set in hand in response to the crisis, I will continue to seek to strengthen financial stability. In doing so, I will always ask the following questions:
- Are we regulating in as growth friendly way as possible?
- Is what we are proposing proportionate?
- Have we considered the effects of what we are doing on the market-place?
I want to strike a balance that keeps banks safe but also sees them return to the mainstream of our economy and society. For that to happen, I know the banks recognise they have an obligation to act responsibly, to provide a lead, to drive forward improvements in conduct and behaviour.
I am sure that by working together – banks, supervisors and regulators - we can keep our banking sector strong, reduce risk, but also support the investment and growth that Europe needs.