Building the Future – Integrating Europe’s Financial Sector

Speech by Gertrude Tumpel-Gugerell,
Member of the Executive Board of the ECB
“Networked Business and Government – Something Real for the Lisbon Strategy”
Finland’s EU Presidency Conference
Helsinki, 23-24 October 2006

[Slide 1] Title

Ladies and gentlemen,

It gives me great pleasure to address this conference and to return to this lovely part of the world. I recall what I could perhaps refer to as a typically Finnish experience that I had a couple of years ago on a working visit to Lapland. After a long day of discussions, our Finnish hosts asked us to get from the meeting room to the dinner location on skis, [with the idea, I guess, of helping us to “break the ice”; if not “break a leg”!]. Although two-thirds of the guests had never stood on skis, the Finnish hosts just presented us with enough pairs of cross-country skis for everyone. It was expected that we would simply give it a try, and we all did. This straight-forward, no-nonsense approach of the Finnish people is, I think, a valuable lesson for the rest of Europe. Finland’s high-performing secondary education system and this country’s readiness to embrace new, innovative technologies further proves the point: a lot of pragmatism is necessary to build the future of Europe and, in particular, Europe’s financial sector.

[Slide 2] Jean Monnet on European integration

Pragmatism is certainly a virtue that Jean Monnet, one of the founders of modern Europe, did not lack. As the quotations show, he had not only a lot of pragmatism, but also a clear vision of what an integrated Europe should be and of the possible hurdles along the way to achieving that vision. Unfortunately, some of these challenges in building a future for Europe are still valid today.

Still, we have made a lot of progress in many areas, and I would like to highlight three areas of the financial sector in which European integration has proved to be successful and where work is still ongoing.

  • The first area is retail payments, the efficiency of which will be boosted by the introduction of the Single Euro Payments Area (SEPA). The SEPA project will create a new pan-European competitive environment for retail payments. This is an area where Europe got off to a slow start, but is now making good progress.

  • The second area is the provision of settlement services for securities transactions, an area in which the Eurosystem has recently decided to investigate options of becoming active as a provider, in order to ensure technical efficiency in the provision of central bank liquidity. This decision was based on the observation that market-driven initiatives towards more integration in this area have had a mixed start and have made only slow progress.

  • The third area is the institutional integration of the supervisory practice and framework. Here we observe that efforts are ongoing, but that the results are not yet sufficient.

[Slide 3] SEPA – Single Euro Payments Area

Since 2002 euro area citizens have been able to pay from Lapland to Sicily with a common set of banknotes and coins. Yet a credit transfer from Frankfurt to Paris is still difficult and a cross-border direct debit is almost impossible. The SEPA will mean competition, consolidation, cost reduction and choice.

The SEPA will also bring about innovation beyond its core payment services. We refer to these developments under the title eSEPA. Value-added services and automated end-to-end processing will help to make many modern types of economic interaction more convenient, speedy and efficient.

Let me mention an example that has been very successful in Finland and other Nordic countries: namely, electronic invoicing and online payments. The major benefits of this for customers come from the fact that the invoice handling process is completely automated. There is no need for the payee to physically print and send invoices, or for the payer to transfer data into an accounting or banking system. Instead, the electronic information can be re-used directly by all parties. The potential savings for users (especially corporates) of such e-invoicing services throughout the SEPA could easily add up to many billions of euro each year. This example shows that the SEPA and eSEPA offer excellent opportunities for efficient retail payment and banking services in Europe.

[Slide 4] TARGET2-Securities

In July 2006 the ECB announced that the Eurosystem was evaluating opportunities to provide settlement services for securities transactionsThis proposal is called TARGET2-Securities. If it materialises, it will bring about significant improvements to the way in which securities settlement in euro occurs.

TARGET is the biggest payment system in Europe. It was built by the Eurosystem for the start of Economic and Monetary Union in 1999. TARGET2 is its second version – more efficient, less costly and more user-friendly – which is set to be launched in November 2007. Following on from this, TARGET2-Securities is a project which would make use of (or link with) the TARGET2 platform to settle the cash legs of securities transactions.

The purpose of TARGET2-Securities is to maximise safety and efficiency in the settlement of euro-denominated securities transactions. Safety is maximised by using the delivery-versus-payment mechanism. Efficiency is maximised by settling cash and securities on the same IT platform, according to the so-called integrated model.

Why are central banks becoming active in this area? CSDs in the euro area are, to a large extent, local monopolies. By merging their settlement function into a single system, the market will benefit from economies of scale. More than seven years after the launch of the euro, the market is still a long way from providing a coherent settlement platform for euro-denominated securities, despite the demands of users who want to benefit from economies of scale offered by the new currency. Only one stakeholder [CSD] has progressed in this direction. This settlement platform, which will open next year, will cover only part of central bank money settlement for euro-denominated securities, and will only cater for three national CSDs of the euro area. The aim of the TARGET2-Securities project is to provide a single platform for central bank money settlement, for all euro-denominated securities, and for all CSDs in the euro area. Already, potential users have signalled an interest in exploring the relationship to settlement systems in other countries as well.

Evaluating the cost and potential efficiency gains of the project is the subject of a feasibility study which has just been launched. It is therefore far too early to be able to give you an estimate of the size of the fee reduction it may entail. What is clear, however, is that this project will only make sense if it can be proven that it offers a substantial potential for reducing securities settlement fees; and I am not just talking about cross-border fees, but also domestic fees. Therefore, TARGET2-Securities may well prove to be another prominent example of the considerable economies of scale that financial integration can deliver in the field of market infrastructures. However, at this time, we must wait and see.

[Slide 5] Institutional integration

Institutional integration is a key for financial integration, as it sets a level playing-field for all market participants. Market participants need, and are indeed calling for, supervisory convergence, legal certainty and transparency.

The Lamfalussy approach is the EU’s structure for developing and adopting financial services legislation at the European level. It was adopted in 2001 for legislative measures on securities and was extended in 2005 to cover legislation in the fields of banking, insurance and pensions.

To be completely successful, however, the Lamfalussy approach needs to receive active support. The work of the Level 3 Committees is expected to promote supervisory convergence and cooperation, thus providing an effective response to challenges arising from EU financial integration. However, as noted in the First Interim Report of the Inter-institutional Monitoring Group, the Lamfalussy process is still a “learning-by-doing process”, and some issues may need further consideration. For instance, the report notes that there is “a potential danger in the fact that the results of the Level 3 Committees may be more “consensus” than “best practices” driven”. Unfortunately, it would appear that national considerations might be slowing down the legislative process.

However, existing tools could and will be further developed to foster supervisory convergence. More specifically, on 5 May 2006, the ECOFIN Council endorsed a report by the Financial Services Committee (FSC) that made a number of recommendations to enhance the functioning of the Lamfalussy structure. These recommendations include the introduction of a mediation mechanism between supervisors, the delegation of tasks/responsibilities among supervisors for enhancing home-host cooperation, and the streamlining of information and data for cross-border business. The FSC will monitor the implementation of these recommendations and will report to the EU Council.

It is even more important that the Lamfalussy approach is strong and efficient, now that it has been extended to banks. Everything should be done to explore as fully as possible the opportunities that the Lamfalussy structure offers.

Next year’s review of the achievements of the Lamfalussy committee will allow us to take stock of the progress made and reflect on possible improvements.

However, the Lamfalussy approach alone is not sufficient for the adoption of new legislation fostering integration. Integration will not be achieved without strong institutions and political will. In Jean Monnet’s words: “Nothing is possible without humans, but nothing is lasting without institutions”.

As regards the need for political will, we need to accompany the current structure with a stronger political commitment and a specific plan (set by the EU Council) with clear dates and steps that set out how the process is to progress.

Regarding the need for strong institutions, depending on next year’s review, the Lamfalussy committees may need a stronger legal basis in order to make activities for achieving supervisory convergence more effective. Maybe we will learn that convergence is not sufficient. For the time being, however, the banking industry is calling for identical rules and practices.

A stronger political commitment and (possibly) a stronger legal basis would allow the Lamfalussy committees to move away from consensual decision-making (which gives laggards the power of veto), thus enabling experts to make the progress necessary for a more integrated financial system.

[Slide 6] ECB activities

The ECB has defined four areas of activity in the area of financial integration:

  1. to enhance knowledge and raise awareness and to measure the progress made; e.g. via indicators of financial integration, speeches, conferences and research priorities;

  2. to act as a catalyst for private sector activities by facilitating collective action and assisting with possible coordination problems; e.g. SEPA, standard market legal documentation (European Master Agreement);

  3. to provide advice on the legislative and regulatory framework for the European financial system; and

  4. to provide central banking services that foster European financial integration; e.g. TARGET I and II, the new TARGET2-Securities project, single list of collateral, etc.

[Slide 7] Obstacles

What are the three most critical obstacles in the examples discussed, and for financial integration in general?

  1. A lack of political commitment: rather than an obstacle, the lack of political commitment is the missing bridge between European countries. Strong political leadership is necessary to pave the way for a truly unified Europe.

  2. Vested interests: discussions and committees are too often plagued by vested and national interests. To build Europe, we need to behave as Europeans!

  3. An inertia in adopting new technology: Finland has benefited from an early focus on IT-investments and an open attitude towards the widespread use of modern IT. Europe should learn from this positive, “Finnish” attitude of proposing and implementing new ideas.

[Slide 8] Measures

Let me conclude by suggesting three specific measures. We must:

  1. intensify the integration of retail banking markets: SEPA;

  2. speed up the integration of key financial market infrastructures: TARGET2-Securities; and

  3. build the political commitment to fully exploit the potential of the Lamfalussy framework, to foster effective supervisory convergence and to actively monitor the results.

In a recent Wall Street Journal article, the Nobel Prize winner Edmund Phelps invited Europeans to become more pragmatic and to stir our dynamism, defined as “the fertility of the economy in coming up with innovative ideas believed to be technologically feasible and profitable – in short, the economy’s talent at commercially successful innovating”.

In his view, dynamism fosters innovation and, in his words, “a more innovative economy […] also comes through the recruitment of new participants to the labour force” […] and it makes “possible a reduction of the “natural” unemployment rate. Thus, high dynamism tends to bring a pervasive prosperity to the economy on top of the productivity advances and the self-realisation going on”.

In essence, these are the elements of the Lisbon agenda, which in March 2000 set the EU the goal of becoming “the most dynamic and competitive knowledge-based economy in the world” by 2010. In 2005 the European Commission presented a new approach to the Lisbon strategy focusing on growth and jobs.

Phelps therefore would agree that Europe is taking a step in the right direction and that we are making progress.

[Slide 9] Bridges

However, I think we are taking too long to agree on and implement measures. And we spend too long discussing compromises, instead of coming up with the best solutions. Europe has built bridges. Let’s use them!

Thank you for your attention.

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