Vice-President Valdis Dombrovskis
Keynote speech on completing the Banking Union and deepening the Economic and Monetary Union
Madrid, 8 June 2018
Ladies and Gentlemen,
Buenos días y muchas gracias por invitarme hoy! It is a pleasure to be here in Madrid.
Unfortunately I am a bit too late to celebrate Real Madrid's third Champion's League victory in a row, two weeks ago.
But Spain's success is not limited to the football field. The economy is in its fifth year of expansion. And just like Real Madrid, the three last years have been especially good, with over 3 percent growth in each. This achievement means that Spain is second only to Poland among the EU's best performing large economies.
And the banks represented here today contribute fully to this. By helping Spanish companies to invest, scale up, and sell into bigger markets, they play a fundamental role in creating jobs and growth. And with their successful expansion across Europe and in other parts of the world, Spanish banks also play on the global stage.
Ladies and Gentlemen,
The crisis showed the need for an integrated European banking system based on a single rulebook, with a single supervisor, and a common mechanism to manage banking crises. That is why in the euro area we established the Banking Union.
The banking Union is the right framework for European and Spanish banks to further develop and flourish. It upholds high standards of regulation and supervision, recognised internationally among markets and investors. It ensures a level playing field and allows banks to expand cross border while still subject to a single supervisor. And it reduces the bank sovereign link, enabling banks to be judged in the first place based on the business they do.
So far, we have two pillars in place: the Single Supervisory Mechanism and the Single Resolution Mechanism. This setup is working well, but the Banking Union is incomplete. To guarantee a true level-playing field for banks across Europe and secure the credibility of the current system, we need to put in place the missing elements. This is an important part of creating a more resilient Economic and Monetary Union.
Back in 2016, EU countries agreed unanimously on a roadmap to complete the Banking Union, by both reducing and sharing risks in the banking sector. And the Commission is following this roadmap. Just this week, I sent EU finance ministers an update on the continued progress in risk reduction.
EU heads of state have pledged to make concrete commitments to deepen the EMU at a meeting later this month. And I am working with all sides to help deliver on this promise. 74 percent of Europeans think having the euro is a good thing for the EU. Completing EMU will secure the future stability of our currency in the face of rising global risks, and – what counts above all – the prosperity of all Europeans.
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Over the past years, a lot has been achieved to put the banking sector on more solid ground, not least here in Spain. The structure of the Spanish banking sector was successfully overhauled, and a large part of the legacies from the crisis have been addressed. For example, Spain has worked hard to reduce the ratio of non-performing loans, which has gone down from 8.1 % at the end of 2014 to 4.7 % last autumn.
This is close to the EU average of 4.4 %, but still above pre-crisis levels. It is now important that work continues, and that other banks and countries where legacy risks are higher follow the Spanish example. To support this, we presented in March a whole package of measures to help banks further reduce current NPLs and prevent their future accumulation.
To withstand future shocks, a successful Banking Union must also be based on sufficient buffers of capital and liquidity. At the EU level, we now have a single rulebook for banks and a coordinated system of financial supervision. Regular stress tests have shown that today, Spanish and European banks are significantly better capitalised and more resilient than before the crisis. Many banks are also embracing the future by investing heavily in innovation and the digitalisation of banking services, not least here in Spain.
All in all, this means that banks are well prepared to fulfil their role of providing funding to the real economy. This includes lending to Spanish SMEs, who no longer consider access to credit an important problem.
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To complete the Banking Union, we need rules for capital and liquidity buffers in line with international standards. So I am happy that Spanish banks already satisfy many of the requirements of the 2016 Banking Package, on which EU Member States reached a deal two weeks ago. This package aims to further reduce financial risks and increase the resilience of our banking sector, by introducing internationally agreed standards into EU rules. Although it is not yet adopted, I can already give you three examples of how Spanish banks are well prepared for its requirements:
First, the package introduces a binding leverage ratio of 3% for all banks, and an additional buffer for global systemically important banks. The same ratio for large Spanish banks is around 5.5%, and above the EU average.
Second, the package requires banks to build up bail-inable buffers. So in case of losses, it is the banks' creditors, not taxpayers, who are first in line to cover them. This includes an agreement on loss absorbing capacity, with which the largest banks will have to comply.
Here, Spain benefits from its early adoption last June of the directive on the bank creditor hierarchy, more than a year before the transposition deadline, which will be in December 2018. Because of this, the practice of issuing the new class of senior non-preferred debt is already well established among Spanish banks.
The agreed banking package would also facilitate the use of the resolution strategy of multiple point of entry, which is used by some Spanish banks.
And third, the package limits banks’ over-reliance on short-term wholesale funding by introducing a net stable funding ratio. The first data from Spanish banks show that the average Spanish NSFR ratio is already above 110%, which meets the requirement.
In addition, the package prepares the EU to follow up the international work on the Fundamental Review of the Trading Book. The recent agreement reached in the Council provides that we would start with a reporting requirement, once the work in the Basel Committee is completed. This would give all of you sufficient time to prepare.
Finally, our package will be good news for smaller banks: it introduces measures to alleviate reporting and disclosure requirements, and simplify the calculation of capital requirements.
We invite the European Parliament to reach their negotiation position as soon as possible, so the full package can be adopted at EU level.
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The success in risk reduction achieved lays the ground for further progress on risk-sharing in the Banking Union.
In particular, we need an agreement among EU countries on a workable backstop for the Single Resolution Fund, to act as lender of last resort in case of a serious bank crisis. Merely by existing, the backstop would reinforce confidence in the banking system, thereby making itself less likely to be called on.
The outlines are starting to take shape:
- The backstop should have a sufficient size – about € 60 billion – to be provided by the European Stability Mechanism.
- It should be permanent.
- And it should be able to provide significant funds with certainty at short notice, so resolution can be completed over a weekend - or sometimes overnight - before markets open.
In addition, we need a concrete perspective for a European Deposit Insurance Scheme. This would help to make deposit protection independent of a bank's location.
These are the measures we need to complete the Banking Union by reducing and sharing risks in parallel. And this is the framework that the Spanish and European banking sector need to prosper and finance our economy on a lasting basis.
The EU economy is expanding at a solid pace. Last year in the EU, economic growth was at 2.4% - a ten-year high - and average public deficits fell to below 1% of GDP. But the Commission's own Spring Economic Forecast showed that there are growing risks on the horizon. Financial volatility is increasing, and escalating trade protectionism is turning into a real threat, not just for Europe but also to the global economy.
In an uncertain economic climate, it is always best to be prepared for a storm. This means we need to strengthen the foundation of stability and prosperity in the euro area by completing the Banking Union and deepening our Economic and Monetary Union. By doing this, we can guard against a repeat of the crisis, re-launch convergence among EU countries, and secure better jobs and higher living standards for Europeans.
Thank you very much.