The challenges of European banking sector reform. José Manuel González-Páramo

Transcription

1 The challenges of European banking sector reform XCIII Meeting of Central Bank Governors of CEMLA José Manuel González-Páramo Member of the Executive Board and Governing Council of the European Central Bank Valencia, 10 May

2 The challenges of European banking sector reform: An outline Shortcomings in micro- and macro-prudential supervision and regulation exposed by the financial crisis Supervisory reform in the EU Reinforcement of micro-prudential supervision in the EU Reinforcement of macro-prudential supervision in the EU Regulatory reform Basel III o Main elements of the new capital and liquidity framework o Implementation of Basel III in Europe single rulebook Systemically Important Financial Institutions (SIFIs) Shadow banking Crisis management and resolution Strengthening the resilience of the banking system in Europe 2

3 Regulatory and supervisory weaknesses in the crisis Shortcomings in micro-prudential supervision - capital Inadequate regulation on the quality and quantity of capital Insufficient capital base to absorb losses Market pressure to increase capital ratios during the crisis Need for recapitalisation, involving taxpayers money 3

4 Regulatory and supervisory weaknesses in the crisis Shortcomings in micro-prudential supervision - leverage Lack of (or inadequate) rules on leverage build-up of excessive leverage in the system before the crisis, dynamic deleveraging during the crisis 4

5 Regulatory and supervisory weaknesses in the crisis Shortcomings in micro-prudential supervision: other issues Insufficient/non-existent regulation of liquidity Over-reliance on short-term market funding to finance longer-term assets Inadequate rules on securitisation exposures and other trading book items Substantial losses on these activities Lack of (or inadequate) supervision of shadow banks Insufficient risk coverage of regulation Excessive reliance on credit rating agencies (CRAs) Herd behaviour, excessive market volatility due to large-scale rating changes 5

6 Regulatory and supervisory weaknesses in the crisis Shortcomings in macro-prudential supervision Several risks identified before the crisis, but no coordinated policy response Only some ad-hoc measures at the national level (e.g. Spain) Lack of clear institutional framework for macro-prudential policy Lack of explicit objectives Lack of well-defined tasks and powers Bias towards inaction Insufficient cooperation among authorities both at the national and international levels Insufficient information flow Lack of data (especially for non-bank financial institutions) 6

7 Supervisory reform in the EU What failed at EU level? Micro-level European supervisory committees had limited power to act Extensive supervisory discretion at national level Regulatory arbitrage across EU member states Supervisory cooperation insufficient for the level of integration in financial markets in Europe Macro-level Lack of macro-prudential supervision in the EU 7

8 Supervisory reform in the EU ESAs and the reinforcement of micro-prudential supervision in the EU 1 January 2011: establishment of the three European Supervisory Authorities (ESAs) and of the European Systemic Risk Board (ESRB), supported by the ECB The three ESAs are sectoral EU agencies All the heads of the national supervisory authorities are represented in their decisionmaking bodies Main tasks : Contribute to the establishment of high quality common regulatory and supervisory standards and practice Contribute to a consistent application of EU legislation The ESAs are expected to improve the quality and consistency of financial regulation in Europe Day-to-day supervision remains at national level 8

9 Supervisory reform in the EU ECB-RESTRICTED ESRB and the reinforcement of macro-prudential supervision in the EU The European Systemic Risk Board (ESRB) is the EU body responsible for macro-prudential supervision for the whole EU financial sector. All main public authorities (e.g. central banks, European and national supervisory authorities) are represented, including all the financial sectors Close links with the ECB (President, Secretariat, supportive role) but clear distinction with the monetary policy task of the ECB Limited number of policy recommendations thus far public recommendations on FX lending, USD funds, macro-prudential mandates The ESRB setting provides the necessary institutional and operational connection between the financial stability analysis developed by central banks and the policy tools mainly available to supervisory authorities. 9

10 Regulatory reform - Basel III Main elements of the Basel III framework Capital requirements Enhancing the quality (i.e. loss absorbency) of the capital base, focus on core elements of capital (common equity) Increasing the quantity of capital (minimum + buffers) Ensuring harmonisation and consistent application of requirements Leverage ratio Supplementary, non-risk based measure Calibration subject to observation and revision Liquidity ratios Liquidity Coverage Ratio (LCR) establishes a minimum level of high-quality liquid assets to withstand an acute stress scenario lasting one month Net Stable Funding Ratio (NSFR) aims to ensure a closer alignment of the funding of longer-term assets or activities 10

11 Regulatory reform - Basel III Implementation timeline Gradual implementation globally, starting from 1 January 2013 Full implementation by 2019 Observation periods for leverage ratio and liquidity ratios Implementation review by the Basel Committee (US, EU, JP underway) Potential impacts on banks and markets Long-term impacts positive Lower risks of systemic crisis less need for government intervention Transitory impacts estimated to be moderate Impact on GDP and lending depends on the speed of implementation Frontloading of implementation should be avoided to mitigate deleveraging pressure (but market pressure induces frontloading) Impacts continuously analysed by the Basel Committee and the EBA Quantitative impact studies published on BCBS and EBA websites 11

12 Implementation of Basel III in Europe ECB-RESTRICTED Key issues of implementation Implemented in 2012 and will come into force on 1 January 2013 through a Directive (CRD IV) and a Regulation (CRR) Main element of discussion: maximum harmonisation versus national discretion for macro-prudential purposes Maximum harmonisation stems from the shared need to establish in the EU a single rulebook for credit institutions via Regulation Regulation is directly applicable in all EU member states, therefore limited role for national discretion Single rulebook is a pan-european project Ensures level playing field Reduces compliance costs Supports financial integration 12

13 Implementation of Basel III in Europe ECB-RESTRICTED Single rulebook vs. national discretion Need for national discretion stems primarily from Differences across countries in economic and financial cycles Differences in structural features of the respective financial sectors A balance can be struck between the two objectives (single rulebook and national discretion) Ex-ante coordination at the EU level (ESRB as a natural body) for macroprudential measures to be taken at the national level. Only calibrations may change at the national level, while concepts and definitions should remain intact Full transparency of measures has to be ensured Adoption of macro-prudential measures at the national level is likely to affect the banking business in a significant way 13

14 Regulatory reform SIFIs On-going work on Systemically Important Financial Institutions (SIFIs) Address the negative externalities and moral hazard issues linked to the toobig-to-fail problem The Financial Stability Board (FSB) focuses on developing a comprehensive policy approach to SIFIs. In November 2011 specific measures were announced as regards global systemically important banks (G-SIBs), including a common equity capital surcharge. In the first half of 2012 work is under way to appropriately extend this framework to other SIFIs, in particular domestic SIBs (D-SIBs) as well as other non-bank entities. This agenda needs to see progress in a way that addresses the key role such entities play in financial stability. 14

15 Regulatory reform Shadow banking On-going work on shadow banking Coordinated by the Financial Stability Board (FSB) - Initial recommendations set out in the FSB report published in October 2011 Key issues: (i) Definition of regulatory perimeter, (ii) Risk shifting between institutions, (iii) Data and coordination issues Five work streams have been launched to develop proposed policy recommendations: Banks interactions with shadow banking entities Money market funds Other shadow banking entities Securitisation Securities financing and repos Policy recommendations expected to be prepared by end 2012 In the EU context, the Commission launched a public consultation on the issue 15

16 Regulatory reform - Crisis management and resolution On-going work on crisis management and resolution in Europe Upcoming proposal of the European Commission for a Directive - proposal expected to be fully in line with international standards Overriding policy objective: setting a harmonized EU framework which would enable national authorities to prevent the systemic damage caused by disorderly failure of banks, without exposing taxpayers to risk of loss and causing wider economic damages. Scope: as broad as possible (all credit institutions and investment institutions) Approach: i) emphasis on crisis prevention first; ii) stronger and more effective toolbox for early interventions; iii) harmonised procedures and tools for resolution. Main open issues: Bail-in and financing arrangements, cross-border resolution tools

17 Strengthening the resilience of the banking system in Europe Supervisors regularly conduct stress tests to assess resilience of financial institutions National exercises, BCBS guidance (April 2012) In addition, in the EU, European Supervisory Authorities coordinate regular stress tests (for banks and insurance companies; under development for market authorities); these stress tests are undertaken by the ESAs and the National Supervisory authorities (NSAs) and are based on common assumptions and methodologies across the EU For banks, the European Banking Authority has published firm-level results in 2010 and 2011 (no stress test exercise is planned for 2012) For insurance companies, sector-wide results/assessment have been published by the European Insurance and Occupational Pension Authority in 2010 and 2011; new exercise underway In the specific case of the EU, one additional capital exercise (not a stress test) in late 2011: Driven by recapitalization needs due to sovereign stress A one-off exercise, it supersedes the 2011 stress test exercise 17

18 Deleveraging of European banks mainly driven by nonregulatory issues EBA exercise and associated capital targets - Banks are required to fill the capital shortfalls by 30 June EBA s assessment: banks are meeting the requirement mostly by raising new capital (77% of total recap needs) Source: EBA Source: EBA 18

19 Deleveraging of European banks mainly driven by non-regulatory issues EBA oversight with aim to avoid hampered lending to private sector EBA has imposed strict conditions to avoid deleveraging: Deleveraging does not reduce the amount of capital that banks need Banks can meet the requirements only by raising new capital, retaining profits, selling selected assets, roll-over of IRB models (if pre-agreed with NSAs) Banks submitted Capital Plans to their NSA, and then to the EBA, to contribute to: Quality of the plans Consistency across banks (e.g., issuance of new convertible instruments, treatment of change in banks balance sheets) Minimise potential negative cross-border spillovers Several other factors driving deleveraging: Demand side factors Funding issues 19

20 Funding and deleveraging Should we fear deleveraging? Deleveraging need not be negative Certain banks balance sheets are excessively large No obvious macroeconomic impact if assets sold at book value Asset sales and associated redistribution could imply more efficient allocation but problems arise when Banks are forced to sell at distressed prices Deleveraging pressures increase reluctance to rollover loans or extend new credit to productive sectors of the economy Cross-border impacts are significant 20

21 Conclusions Several shortcomings in micro- and macro-prudential regulation and supervision revealed by the crisis complete overhaul of prudential rules and institutional arrangements, both internationally and in Europe (ESAs, ESRB) Basel III is cornerstone of regulatory reform, Europe is taking the lead implementation in 2012 via a Directive and a Regulation Single rulebook is an important European project flexibility should be provided to national authorities, subject to strict safeguards Key areas of on-going work in the area of financial regulation SIFIs, shadow banking and crisis management Several initiatives underway to strengthen the resilience of the banking system in Europe stress tests and recapitalisation exercise 21