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The title of the conference, “EU banking regulation at a turning point”, indicates that the regulatory environment seems to be undergoing a fundamental shift. While the years following the global financial crisis have been devoted to reinforcing the regulatory framework to prevent a recurrence of similar failures, the public debate seems to have shifted away from focusing on safety and stability towards placing greater emphasis on competitiveness.
Shifts in public opinion on regulation are nothing new. There is a natural ebb and flow of regulatory intensity driven by crises, economic conditions and political priorities. After a crisis, there is often strong public support for stricter regulation, which tends to weaken over time as the crisis recedes.
In today’s remarks, I want to give you a supervisory perspective on the regulatory cycle and its shifting priorities.
I would like to make three main points.
First, it is a fundamental misconception to frame safety and competitiveness as opposing forces. A stable and secure financial system forms the bedrock of long-term competitiveness.
Second, the post-crisis reform agenda in Europe is not yet complete. Notably, the banking union is still unfinished and the capital markets union requires more ambition. For me, there is a clear link here between these important policy objectives and buttressing the competitiveness of the sector.
Third, we need to tackle emerging risks, such as the growth of the non-bank financial intermediation (NBFI) sector, and the rising geopolitical risk, which manifests itself in a number of ways, including in concerns about cyberattacks. Tackling these risks will contribute towards ensuring the continued resilience of the financial system.
As the great financial crisis fades into the rearview mirror, it seems that competitiveness considerations have taken the wheel. However, just as guardrails on a motorway do not impede drivers but ensure they stay on the road, a robust regulatory framework sets safe boundaries for banks, enabling them to fulfil their role of lending to the real economy.
Let me take this traffic metaphor even further. There are countless studies showing that speed limits not only reduce danger but also minimise congestion, thereby reducing the overall travel time. It’s a fallacy to think that higher speed limits mean faster travel, just as laxer regulation does not lead to more sustainable growth. Similarly, regulatory competition between jurisdictions is more likely to lead to a race to the bottom than to a robust regulatory framework.
Research consistently shows that well-capitalised banks are better positioned to support the real economy thanks to their enhanced capacity to absorb losses and maintain stability, even under financial stress. Specifically, impact assessments for the Basel reforms have demonstrated that while there may be short-term economic costs, these are far outweighed by the long-term benefits, most notably increased economic resilience.
As for concerns over competitive advantages or disadvantages, I am not convinced that EU banks are at a disadvantage. In fact, the notion that regulatory requirements are more stringent in the EU than in the United States does not hold up to scrutiny. Evidence shows that global systemically important banks (G-SIBs) in the United States face slightly higher capital requirements than their EU counterparts.
Furthermore, when we account for differences in how banks calculate risk-weighted assets, it becomes clear that average capital requirements for significant institutions in the banking union would be somewhat higher under US rules. This directly challenges some of the industry reports that suggest otherwise.[1]
Let me now move to my second point: the need to complete the banking union and the capital markets union.
In recent years, Europe’s banking sector has demonstrated resilience amid unforeseen challenges, including the coronavirus pandemic, the energy supply shock following Russia’s invasion of Ukraine and high inflation.
This resilience is reflected in the numbers: in 2015 the average ratio of non-performing loans (NPLs) for significant banks in the banking union was 7.5%, at a time when some banking systems had ratios close to 50%. At the end of the second quarter of this year, this ratio had decreased to 2.3%, driven mainly by the reduction of NPLs in high-NPL banks.
Similarly, the Common Equity Tier 1 ratio for significant banks has risen from 12.7% in 2015 to 15.8% today. Bank profitability has increased considerably in recent quarters, benefiting from higher interest rates, and return on equity now stands at 10.1%....
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