Analytics, Banks, EU – Baltic States, Financial Services, Legislation, Loan, Markets and Companies

The banking sector as a whole has a big job to do in terms of rebuilding trust in the financial sector. It has to be seen as part of the economy and society, not divorced from the mainstream; to make European economy stronger, it needs strong financial services.

But to be in the mainstream, the financial sector has to change. In all parts of the banking sector, there needs to be strong values and culture and a reconnection with society, businesses and customers. If banks can do that, the EU institutions will champion the contribution they make to growth and jobs.

Sector’s role

Banking sector provides about €4 trillion in loans, a big share of which goes to SMEs in the European Union. In some EU states, the sector provides between 30 and 40% of all SME lending. Seeking to rebuild Europe's economy, this channel of funding shall be supported and developed.

There are many examples of smaller banks and cooperatives which have steered clear of the financial crisis and managed their businesses prudently. But the fact that a bank has a particular charter does not unfortunately guarantee that it is immune from management failure. Smaller institutions can trigger a general loss of confidence in deposit safety and spark contagion.

Recent history shows that smaller banks, operating mainly in regions of a country, can have systemic consequences. The consequences of the failure of Northern Rock in the UK in late 2007 went far beyond Newcastle-upon-Tyne. It was the first bank run in the UK for 150 years and the footage of hundreds of people queuing up at local branches became a symbol of the financial crisis.

Therefore, the EU’s response has to encompass smaller institutions and cooperatives; financial regulators cannot worry only about big banks.

Present situation

A period of intensive rule making in the EU in general and the banking sector, in particular, lasted last 5 years: it was a difficult task to craft rules that make sense everywhere in Europe. The EU had to respond to the financial crisis and to help restore financial stability and public confidence in the financial sector.

The EU started with creating the single rulebook; i.e. to ensure that banks were better capitalised and risks better controlled.

As the financial crisis evolved and turned into the Eurozone debt crisis, it became clear that, for those countries which shared a currency and were even more interdependent, more had to be done. The Commission has had to break the vicious circle between banks and national finances creating the Banking Union and making the European Central Bank the single supervisor for the Banking Union; besides, a supervisory cooperation via the European Banking Authority was established. As a result some strong institutions have been created with the skills they need to do the job properly.

New arrangements were tested in 2014: the largest European banks were subjected to the Comprehensive Assessment, made up of the stress test and the asset quality review (AQR). It was the widest and toughest test ever. The AQR element alone involved an in-depth examination of some € 3.7 trillion worth of Eurozone banks' assets.

The aim was to identify and address any remaining vulnerabilities in the EU banking system and to dispel doubts about their health. This was to help restore trust and investor confidence and allow the banks to get on with their primary business: lending to households and businesses and financing the rest of the economy.

The European Banking Authority and the ECB did an excellent job, the Commissioner acknowledged: the results showed the European banking sector was more resilient and much better capitalised – by over €200 billion in 2014 alone. EU banks’ capital ratios are now at 12%, similar to levels in the US. And the vast majority of banks have a significant buffer to withstand future shocks, which should help reassure investors.

However, not every bank passed the test successfully; some weaknesses were identified. But, having shone the lights on these weak points, supervisors both in the SSM and outside the Banking Union are now working hard with the banks concerned to put this right. Reaction abroad was positive: the US regulators and the market think now that the EU tests were credible.  

Capital Market Union

As a result of the new regulatory framework, supervisors’ actions and market pressure, the EU banks are now stronger putting them in a better position from which they will be able to lend again.

The Commission will continue to focus on securing financial stability needed to sustain growth. Therefore the Commission is committed to finalising rules on Bank Structural Reform, money market funds and benchmarks, and to bringing forward new proposals to deal with risks arising from entities other than banks when they need to be resolved.  

However, the Commissioner thinks that if in recent years, it was the financial crisis that posed the greatest threat to finance stability, the nature of the present threats is different due to the lack of growth.

Commission President Juncker’s first major policy idea was to launch a €315 billion investment plan to help kick start investment in infrastructure. In February 2015, the Commission unveiled the first phase of a new drive to build a single market for capital, i.e. a Capital Markets Union for EU-28 states, which is supposed to bring new opportunities for businesses, for retail and institutional investors as well as for the banks.

The aim of the Capital Markets Union is to put savers in touch with more opportunities for growth. By increasing the flow of capital, the EU will increase investment opportunities, help businesses get the capital they need to expand, provide more options for people to save for their old age, and strengthen financial stability.

The EU needs to maintain the banking system’s vital role in Europe's economy and the contribution that banks make to local communities. The idea is to develop the EU’s capital markets which would complement existing sources of funding, not replacing them. In some parts of Europe, where banks are not lending, the start-ups and SMEs are struggling to survive and they need to be able to tap into alternative sources of funding.

However, banks will continue to be an important distribution channel for market funding, particularly in reviving securitisation. The aim here is to encourage an EU market for high-quality securitisation, with transparent, simple and standardised criteria. Achieving that, the EU would help free up banks' balance sheets so they can lend more to Europe's households and businesses. “If SME securitisations could be returned – safely – to just half the level they were in 2007, this could be worth some €20 billion in additional funding”, he added.  

Together with the Commission’s Green Paper on the Capital Markets Union, it launched a specific consultation on securitisation. The Commission sees that the Capital Markets Union as “an overall pot” to benefit everyone: banks, capital markets and, most importantly, firms which would find more sources of funding. Besides, the EU-wide capital market would remove obstacles to savings finding their way to productive use in the economy. At the same time, it would give a choice to companies on where and how to get financing.

Cumulative impact of banking rules

Legal framework for Europe's banks is not yet finished; the Commission would complete some practical details for the Capital Requirements Directive and Regulation, the BRRD and MiFID.

European Banking Authority and the Commission successfully prepared large volumes of draft implementing legislation with positive developments for the successful development of the single banking market.

These reforms have brought already significant changes to banks, to their capital levels and their liquidity. Now the Commission wants to examine how these changes have affected banks’ ability to lend to businesses, infrastructure, and other long-term investment projects. In particular, it will investigate how all the recent changes have affected banks' ability to support local businesses.

In summer 2015, the Commission will launch a consultation on the impact of the Capital Requirements Regulation on lending to businesses and on long-term finance, with a specific focus on SMEs. Drawing on the feedback and other research work, it will come up with conclusions on the impact of increased capital charges on lending to businesses and on determining whether changes might be necessary to the CRR.

Future regulatory initiatives

During past years, the Commission has differentiated the rulemaking in order to ensure that the rules are proportionate to the risks posed and the different business models of different types of banks.

With the Capital Requirements Regulation, the EU adjusted some of the rules to recognise the specificities of savings and cooperative networks, and included favourable risk-weights for loans to SMEs. The Commission did it in the recent liquidity coverage ratios where special recognition was made of the needs of cooperative and savings banks.

However, business feels the burden of legislation on smaller, lower-risk entities; hence the idea is to make a policy differentiation while tackling future challenges with proportionality in the rule-making as a key principle. The aim is to take into account the different risks that different activities and different business models present.

For example, by the end of 2016, the Commission will decide whether it is appropriate to introduce a binding leverage ratio or ratios in the EU (in doing so, the EU need to look at the level of these ratios too). This is an issue where differentiation would be crucial.

Then, there is a need to consider net stable funding ratios: with the EBA's help, the EU will do thorough preparatory work based on careful consideration of the options, and the impact on the diversity of business models in the European banking system.

There are a number of important issues at global level like how to ensure that TLAC guidelines being developed by the Financial Stability Board fit with new EU rules on "minimum regulatory eligible liabilities" in the Bank Resolution and Recovery Directive.

The EU has been a committed supporter and a driver of reforms in the global arena. But as with the capital and liquidity rules, the EU should be in favor of implementing international standards which would make sense for Europe’s diverse financial landscape.

The Commission is keen to explore how to bring the benefits of a safe, stable, well-regulated single market for financial services more directly to consumers in order to be able to benefit from more competition in the EU. It includes both the people who actively move to another country or seek out offers across borders, and all those who remain in their home countries. They, too, should have greater choice, lower prices and a wide range of products suited to their needs.

Thus, the EU needs to consider how quickly banking is changing in the face of new technology and the development of digital services, how the threat of cybercrime could jeopardise the gains already made in enhancing the EU’s financial system safety and security. But different risks that different activities, as well as different business models will be taken into account.

Conclusion

Healthy European banking sector is aimed at supporting growth as well as benefiting EU's citizens, companies, and society as a whole; a system in which taxpayers have to bail out failing banks shall be excluded, said the Commissioner.

Such system shall be diverse, well-regulated, adequately managed and supervised; the system built on strong ethical standards and sound governance. EU banks have made good progress towards that goal; however, the banks have had to respond to the financial crisis.

Future challenges are not met with a volume of new legislation, but businesses want and need regulatory certainty in order to be able to plan ahead. Hence, the Commission will seek to look at regulation through the prism of jobs and growth, and to adopt the Commission would manage a proportionate risk-based approach which reflects the diverse nature of the banking sector.

One thing is certain, strong EU’s economy needs strong banks playing their part in a new European renaissance.

Source: European Commission, Speech by Jonathan Hill, European Commissioner responsible for financial stability, financial services and capital market union at the 6^th Convention on Cooperative banks in Europe. Brussels, 3 March 2015. In:   

http://europa.eu/rapid/press-release_SPEECH-15-4537_en.htm?locale=en