12 November 2013

VP Almunia: A stronger regulatory framework and the Banking Union will support a return to growth

Completion of the Banking Union is urgently needed. However, there are many unresolved questions on the table. Let me highlight a few of them:

• Who is going to be ultimately responsible for the resolution of a failing bank?
• Shall we have a common backstop that the resolution authority can use?
• Above all, have we lost the sense of urgency of June 2012, when the European Council took a firm commitment to create the Banking Union?

The next few months will be crucial. We need to sustain the timid signs of recovery, and eliminate uncertainties regarding the regulatory and institutional framework of the banking system in a period of important political changes. We will have a new European Parliament in June 2014 and a new Commission by the end of next year.

How the new German coalition government will set up its positions; the new Commission will establish its priorities; and the new Parliament will decide to coordinate with the Council are relevant political questions marks.

The future of our economies and of the EMU, as well as the citizens’ trust in the European institutions, all depend on their ability to find the right answers. On top of this, there is no time to waste. The timing of these decisions is also strategically crucial. The Banking Union must be fully in place by the end of this mandate.

What the Commission does - State aid rules

If the comprehensive assessment carried out by the ECB is as rigorous and credible as it should, we cannot rule out that national public backstops or the ESM will have to be used again to restructure or resolve more banks. Here, the way State aid control will function is of great importance. Over the past five years, we have used State aid rules as a substitute for the lacking resolution authorities in the EU. The Commission has analysed the restructuring of 67 banks equivalent to around one quarter of Europe’s banking sector in terms of assets – and 23 of them had to be resolved. And the job is not finished. We still have 27 pending cases, in particular in the periphery of the euro area countries.

The new State aid rules for banks that entered into force in August have been prepared to manage the transition towards the Banking Union, and draw on the insight and expertise we have gained using the old ones for five years.

The new rules introduce three main changes:

Firstly, they reinforce the principle that the banks should share the burden of restructuring, in case of a precautionary recapitalisation as well as in a resolution procedure. This means that, before asking for public funds, banks should go to the market; use available internal resources; and tap their shareholders, hybrids holders, and junior-debt creditors.

The way the new State aid rules deal with the "bail-in" issue in precautionary recapitalisations has created some debate. Logically, investors want clarity on the backstops that will be used. I fully agree.

Let me clarify our position. What happens if the comprehensive review carried out by the ECB reveals capital shortfalls? Before a bank tries to have recourse to public backstops, at national or EMU level, burden-sharing will be carried out according to the new State aid rules. This means above all that shareholders and junior creditors will have to contribute to filling the capital gaps that may be revealed by the comprehensive review.

Of course, if financial stability were at risk, the new rules provide for an exception clause. In this exceptional case, public backstops can intervene before “bail-in” takes place. Preserving financial stability has always been a priority for the Commission and all our decisions on individual cases have reflected this concern. Now the exception makes this explicit.

Secondly, before any public money is disbursed, the Commission will have to agree on how the banks’ private resources will be used to fill the capital gaps and how they will be restructured.

Finally, the new rules cap executive pay for all the banks that receive public aid.

Obviously, the new rules are fully consistent with the resolution framework that is taking shape and which will lead to the Banking Union.

Lessons learned

Our experience with banks in distress – in programme countries and elsewhere – allows me to draw some general conclusions. What went wrong with the banks that have asked for public support since 2008? Problems with funding and liquidity come first by a mile. We have seen many banks in dire straits because of their reckless past policies, especially their over-reliance on wholesale funding.

Second, we’ve learned that there’s no such thing as a safe business model. Even retail and public banks have suffered in the turbulence. In other words, we’ve had ample confirmation that banking is always about the prudent management of risk.

Finally, cross-border banks and dealing with different national authorities have added layers of complexity when it comes to resolving a bank.

Of course, I will not claim that we now know how to predict and prevent all future banking crises. But I can tell you quite confidently that a safer and more solid banking sector needs adequate levels of capitalisation, proper risk management, and better governance and supervision. These are precisely the principles that underpin the Banking Union project.

Close

As we observe the first signs of recovery after a long period of recession, we need a different kind of finance to sustain it: safer, more transparent, and focused on financing the real economy. I have no doubt that the comprehensive response the EU has given to the financial crisis will take us closer to this goal. A stronger regulatory framework and the Banking Union will give investors more certainty in the rules of the game; make Europe’s finance more stable; and support its return to growth.

Full speech

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