Vice President Valdis Dombrovskis
opening keynote adress at the 15th Annual European Financial Services Conference
Brussels, 7 February 2017
Ladies and gentlemen,
It is a great pleasure to address you in this conference: the 15th European Financial Services Forum. I am pleased to have this opportunity to consider with you the relative strength of our financial sector and the challenges we still face. As well as our work to complete the framework for the banking sector and to support investment by building a single market for capital in Europe.
The European financial system - and our banking sector in particular - has recently been put through its paces. But it has shown resilience in the face of uncertainty. The UK referendum result and elections in the United States are shifting key assumptions, key axioms which have long been our frame of reference. To date, the financial sector’s response has been business-like, measured, focused on the task at hand. It has performed well under pressure.
Moderate growth and inflation picking up in the Europe has helped. All Member States are expected to grow this year. EU GDP is higher than before the crisis and set to continue growing. We are slowly reducing public debt levels. And Europe’s banking sector is stronger and better capitalised.
Yield curves are steepening, which should improve prospects for banks. And the slowing pace of regulatory change - the understanding that most major reforms have at least been agreed if not yet fully implemented - has underpinned positive investor sentiment. The European Commission works to support the environment by sticking closely to predictable and evidenced based policy making.
The resilience of our economy and our financial sector is good news. It bears testimony to the measures implemented and the financial sector's work to adjust, sometimes at speed, to new requirements introduced to support broader financial stability. But let’s be clear, structural issues in the EU banking sector and in the global financial system remain.
Let me say a bit more about both, starting with banks. Today, on average, solvency and liquidity positions are strong. European banks have significantly strengthened their capital positions in recent years - even if there remain pockets of weakness. Average capital ratios of significant institutions in the euro area now stand at 13.6%.
But we know that some banks' ability to strengthen their capital buffers is limited by relatively low profits and market valuation. Bank share prices have strengthened in recent months. But we cannot lose sight of the relatively low profitability in Europe's banking sector as we complete a broader framework for the banking sector, to which I will return in a moment.
A related challenge is the remaining high stock of non-performing loans in some European banks. NPLs have declined on average by 5.4% in the first half of 2016. But we need meaningful, determined and coordinated actions to accelerate the clean up of NPLs weighing on our banks and our economy - particularly where they are substantially higher than average. This is a problem in specific Member States. But it has spillover effects on others because it affects the perception of the European banking sector and our economy as a whole. So we need a coordinated approach and a European anchor for tackling NPLs. We are not starting from scratch: Since several years, we have been encouraging Member States to take specific action through our economic policy coordination process - the European Semester. The country reports which we will present later this month will focus on this again. Alongside with the necessary reforms, Member States have various options to support NPL workout, in full respect of the European framework. And at European level, as part of the mid-term review of the Capital Markets Union, the Commission is assessing concrete initiatives how to support the development of a secondary market for distressed debt. So a lot is happening. We now need to fit this into a coherent strategy in the months leading up to the Informal Ecofin where this matter will be discussed.
We should also remember that the full impact of Brexit on EU Banks has yet to be felt. The UK may be about to leave the European Union and the single market, but where it will end up and its future relationship with both remains unclear. This lack of clarity means European banks have to divert energy and resource into contingency planning – rather than getting on with the job of lending and supporting investment in the wider economy. So it is in everyone's interest for the UK's exit to be managed calmly but swiftly.
Looking beyond Europe to the global financial system, we also need to recognise some areas of uncertainty. Monetary policies of large international economies are becoming less aligned. I am thinking in particular of the United States starting to tighten its stance, while elsewhere accommodative monetary policies remain in place. And added to the political upheavals already mentioned, the pressure of protectionist policies is gaining momentum, influencing the debate but ignoring the reality of global supply chains, or indeed the benefits of free trade, competition and choice.
Meanwhile, relatively low interest rates mean investors are willing to consider a broader range of investment opportunities and shoulder more risk. This has lifted asset prices in most market segments, and has compressed risk premia – which could always readjust. In some large emerging markets, lower growth and significant external and internal imbalances are weighing on the global economic outlook.
This backdrop means we should redouble our efforts and support growth. This means striking the right balance between managing risks in the financial sector and allowing it to get on with its job of delivering investment to the wider economy.
This approach has shaped proposals we put forward at the end of last year to strengthen the framework for the banking sector. We proposed to introduce into EU legislation standards already agreed in the Basel Committee and the Financial Stability Board. But at the same time as introducing these risk reduction measures, we made proposals to make our rules more proportionate. To make our legislation more responsive to different business models and risk profiles. So that our banking system remains dynamic and diverse, without making it less stable or resilient: servicing international companies as well as local communities and businesses.
For smaller banks, we are proposing to reduce the reporting burden and reducing administrative costs. Our proposals would reduce disclosure requirements and simplify the calculation of capital requirements for trading-related positions. And give a helping hand to banks lending to small and medium enterprises and infrastructure projects. Investment in these areas is essential to strengthen Europe's competitiveness and to stimulate job creation. With this in mind, we want to maintain the current SME supporting factor that reduces capital requirements for lending to SMEs and extend it to all loans. And we want to support investment in low risk infrastructure projects with predictable cash flows in the same way.
Following the call for evidence, we will also come forward with legislative proposals for targeted amendments to the Emir regulation, to make sure it achieves its objective - safe and transparent derivatives markets - with as little burden as possible for companies which use derivatives to hedge their risks. But let me also say very clearly – the EU will stick to agreed international standards and deadlines. Agreed standards on margin will apply as of 1 March, as agreed internationally and anticipated since a long time.
Meanwhile, work continues at full speed to build a Capital Markets Union. The prospect of Europe’s largest financial centre leaving the single market makes this project more important. We need deeper capital markets so that companies can get the financing and to support the long term investment.
In December last year, we agreed an overhaul to the Prospectus regime to make it easier for companies to issue equity and debt on public markets. A carefully balanced proposal to restart securitisation markets with simple, transparent and standardised securitisations is being discussed by the European Parliament and Council. A proposal to strengthen Europe's venture capital markets and support socially minded investments is also on the table. The first wave of measures is therefore well underway
We are now entering the second phase of the Capital Markets Union project. We have just launched a consultation to shape this next stage, and, building on the initiatives we have already taken, help us go further. Please send us your views.
This notwithstanding, there are a number of areas where work has started and where we want to quicken the pace. I am thinking of our work to support the effective company restructuring to give them a second chance. Our recent proposal to reduce the debt-equity bias in our tax systems as part of the Common Consolidated Corporate Tax Base. And our efforts to see how best to create a pan-European pensions market, before coming forward with legislation later this year.
New priorities include supporting sustainable finance and Fintech. We have set up a High Level Expert Group to develop a comprehensive strategy for the EU. We are keen for Europe's financial sector to make the most of innovation, of Fintech and the opportunities it offers to make financial market infrastructures more efficient.
Ladies and gentlemen,
The European Commission wants to support a safe and dynamic financial sector. This approach lies behind everything we do in this area. It is an approach I want to take forward, working closely with industry, consumer groups, the Member States and the European Parliament. One I believe can keep the financial sector at the heart of the European economy, supporting investment and powering growth.