A Brave New World for Banks

Speech by Commissioner Jonathan Hill European Commissioner for Financial Stability, Financial Services and Capital Markets Union at European Banking Federation, 2015 Annual High Level Conference | Brussels, 17 September 2015

Ladies and gentlemen,

This is a Commission that puts growth and jobs first.

It is a Commission that wants a strong and stable banking sector that is well led, where managers take responsibility. A banking sector that is able to compete internationally and respond to the challenges of a fast moving digital economy. A banking sector that complements – and is integral to – the Capital Markets Union I am working to build.

Yours is an industry that is facing change on many fronts. You have been going through a period of major legislative change. At the same time traditional business models are being challenged by the disruptive force of technologies and profound changes in consumer behaviour. And it’s clear to everyone that we’re only at the beginning of that revolution.

So I know you have been working hard to adapt to these twin challenges.

On the regulatory front, the last five years has been a period of intense rule-making. We have worked to combine better supervision with greater transparency. And to implement reforms that ensure European lenders are better able to cope with the unexpected.

European banks have already introduced major reform.

Last year’s Comprehensive Assessment confirmed that our banks are now more resilient and better capitalised – by over 200 billion euros in 2014 alone. EU banks’ capital ratios now stand at 12%, a similar level to the United States. And where shortcomings were identified, work is underway to plug the gaps.

Markets responded positively to this thorough check-up.

A great deal of trust and investor confidence has been restored. This in turn will help banks get back to basics: lending to households, lending to businesses; financing the wider economy.

These activities are fundamental to our society, to our economy and to our growth. That is why I want banks to be seen as part of the mainstream, not out on a limb.

I am not interested in bashing banks, but in playing my part in building a regulatory framework in which they can prosper.

At the heart of what I do is working for financial stability.

While I want always to regulate in as growth-friendly a way as possible, we must be alert to new sources of risk. And there are aspects of earlier reforms that are not yet finished.

That is why I want to finalise as soon as possible Bank Structural Reform rules to reduce the systemic threat of banks that are too-big-to-fail. It’s why I am committed to finalising the rules preventing the manipulation of financial benchmarks.

I will soon be tabling proposals for an effective recovery and resolution regime for clearing houses.  We have required more clearing to go through central counter parties. That’s good for transparency and will reduce risk. But if we are going to rely more on CCPs, we also need to put in place a system so that we can resolve them if anything goes wrong.

I would also like to see the Money Market Funds regulation finalised. And I was pleased that in June we agreed a regulation designed to increase the transparency of certain transactions in the shadow-banking sector.

It is the legislator’s job to set clear boundaries within which banks can prosper and financial stability be maintained.

Within this framework it is up to banks to promote the right behaviour and culture. And given banks pivotal role in our economy and society – you have a responsibility to take action.

I am sorry to have missed your discussion earlier today on how to improve conduct in your industry. Increased transparency is vital. And so are strong sanctions.

But the right behaviour does not just come from having lots of rules. Indeed sometimes having lots of rules can contribute to a culture where people take less personal responsibility for what they do. We need to have the right values. And for me that means that managers – and politicians for that matter – need to take responsibility when things go wrong.

When I said we need stability, I do not mean the stability of the graveyard.

The EU is growing and recovering. Last year there was growth in 24 out of 28 countries in our union. This year, that figure should increase to 27 out of 28.

This is good news. But we cannot lose sight of the bigger picture.

Last year the EU was responsible for around 15% of global trade in goods, compared to 18% ten years ago. We have 25% of the world’s GDP, but 50% of its social spending. Just over 23 million people are unemployed, of whom about one in five are under 25. The structure of our population is changing. Today, for every person over 65 in Europe, there are around four people in work; over the next 50 years that figure will fall to two.

Given these challenges, this is clearly not a time for ‘steady as she goes’. President Juncker captured that sense of urgency well by saying that we were a last-chance Commission. It is that sense of urgency that is driving me forward in my work to build a Capital Markets Union. And it is what lies behind our common commitment as a Commission to focus on a smaller number of priorities, to legislate less and to legislate better.

Over the past five years, we legislated at speed while the fires of a crisis were burning all around.

Now, we need a period of greater legislative calm. Banks need stability to be able to plan ahead. And to make the investments necessary to remain competitive in remorseless global markets.

So while I think the basic regulatory architecture we have put in place has strengthened our financial system, we need to consider with an open mind whether when you join it up, it is working as we had hoped. That is why I want to undertake a comprehensive assessment of its overall impact. And to explore, with our priority of growth and jobs in mind, whether it has had any unintended consequences.

If it has, if we conclude that we have not always struck the right balance between stability and growth, then we should be ready to change it.

These are issues which G20 and FSB are looking into – also something the European Parliament has been calling for — and something about which I will be saying more in the coming weeks.

European banks face a multitude of other challenges.

New digital and data technology is transforming the financial sector and challenging traditional business models. A fintech revolution is underway. Last year, fintech firms in Silicon Valley trebled the investment they attracted compared to the year before.

European banks will need to adapt. I know that many entrepreneurial European banks are already seizing the opportunities offered by new technologies. To consolidate and to provide improved and cost effective services: across countries and continents.

New technology has a key part to play in creating a diverse Single Market in financial services, and I plan to say more about this in a Green Paper on retail financial services that we will publish later this year.

I value the diversity that is the European banking industry’s strength.

Different banks have different business models that involve different levels of risk. We need to recognise this in our rule-making. And make sure we strike the best possible balance between managing risk and fostering growth.

We took this approach to the Capital Requirements Regulation. We adjusted some of the rules to recognise the specificities of savings and cooperative networks, and included favourable risk weightings for loans to SMEs. We also took different needs into account when setting liquidity coverage ratios.

Yet I know that recent reforms have brought significant changes to banks. I want to examine how these changes have affected banks’ ability to lend to businesses, infrastructure development, and other long-term investment projects. In particular, I would like know how all the recent changes have affected banks’ ability to support local businesses.

That is why I have launched a wide-ranging consultation on the impact of the Capital Requirements Regulation on lending to business and on long-term finance, with a specific focus on SMEs.

I am approaching this with an open mind. Your views matter. And I am looking forward to receiving your input before 7^th October. The evidence you provide will help determine whether changes are necessary to existing legislation, but also inform future policy.

And I want to strike the right balance between supporting reforms at a global level and respecting Europe’s diverse financial landscape.

By the end of 2016 we will need to decide whether it is appropriate to introduce binding leverage ratios in the EU. The same goes for the internationally agreed regulatory metric on net stable funding ratios. And we will also need to ensure that we get the TLAC guidelines right.

Working with the European Banking Authority, we are doing the groundwork to understand the potential impact on the diversity of business models in the European banking system. As with our capital and liquidity rules, we should not be afraid to implement the international standards in a way that makes sense for Europe.

Let me now turn to the Capital Markets Union, in which I hope to see banks play a pivotal role.

The banking system makes a vital contribution to Europe’s economy and to local communities. I want to keep it that way.

Developing our capital markets is a way of complementing existing sources of bank funding and not replacing them. The Capital Markets Union is about growing the overall pot so that everyone can benefit: banks, capital markets and – most importantly – businesses looking to diversify their sources of funding.

In many parts of Europe our start-ups and SMEs are struggling to find the funding they need. A single market for capital will help unlock investment, connect finance to projects, and ensure a more diverse, resilient financial system.

We will publish our Action Plan at the end of the month. It is going to be ambitious. We will need efforts year in, year out; but I also want a quick start to build momentum and confidence.

An early action will include a comprehensive package on securitisation to create a new simple, transparent and standardised product.

Our aim is to revive markets on a more sustainable basis, so that simple, transparent and standardised securitisation can act as an effective funding channel to the economy. To do this we propose to introduce a set of criteria that securitisation instruments will have to comply with to be counted as simple, transparent and standardised, and thus to qualify for a more appropriate capital treatment.

This should help investors ensure that ‘what you see is what you get’. It will help banks diversify risk and free up their balance sheets so they can lend more to the wider economy.

If SME securitisations were returned – safely – to just half the level they were at in 2007, this could be worth some 20 billion euro in additional funding.  It could also help banks better target their lending to the customers they are best suited to serve.

Ladies and gentlemen,

I cannot promise you a Brave New World for banks, not least because I believe that getting the response right to the many challenges you face lies in your own hands.

I cannot promise you an end to regulation. There is much still to finalise.

But what I can promise is to take an approach that is proportionate; that is mindful of the impact that legislation can have on your competitiveness; and that leaves the door open to review legislation once it is adopted.

My approach will be to work with you in the shared knowledge, to quote Mark Carney, that “the age of irresponsibility is over”. I want a competitive banking sector that supports growth and benefits society. A diverse banking sector that operates within rules that are proportionate to risk. A banking sector at the heart of the European economy that has regained the trust of European citizens.

Thank you.

Compliments of the EU Commission