"Priorities of the Belgian Presidency of the EU for the financial services area"
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB, at the EUROFI Conference, Brussels, 28 September 2010
“While the Committee [of wise men] strongly believes that large, deep, liquid, and innovative financial markets will result in substantial gains and therefore bring individual benefits to European citizens, it also believes that greater efficiency does not necessarily go hand in hand with enhanced stability. Increased integration of securities markets entails more interconnection between financial intermediaries on a cross border basis, increasing their exposure to common shocks […] the Committee believes that there is an urgent need to strengthen cooperation at the European level between financial market regulators and the institutions in charge of micro and macro prudential supervision.”
What reads like a quote from the year 2010, actually comes from a report written by The Committee of Wise Men on the Regulation of European Securities Markets under the chairmanship of Alexandre Lamfalussy in 2001 and very well reflects challenges that we are still facing today and we are about to address in the wake of the current crisis.
So let me give you briefly my views on where I see the major priorities in the financial services area. The first one concerns addressing the regulatory lessons from the crisis with respect to micro and macro-prudential supervision. The second one is the strengthening of market infrastructures, the strive for more transparency and to minimize contagion risks and, specifically, the setting up of infrastructures for OTC derivatives. The third priority I see in the field of retail payments, where more harmonization and integration can make the retail payments market faster, safer and more efficient.
1. Supervision and Regulation (including ESRB)
So let me turn to the first priority on supervision and regulation:
A wide consensus that action was urgently necessary to remedy the gaps of the regulatory and supervisory framework highlighted by the financial crisis has pushed the global regulatory community into reflections on necessary actions. I welcome that the regulatory community is delivering what I believe would be significant steps forward in increasing the resilience of the financial sector.
The agreement reached on the Basel III framework constitutes a fundamental strengthening of global regulatory standards. I am of the view that the agreed reform strikes the right balance between the overall objective of strengthening the resilience of the financial sector and thus creating a sounder banking and financial system on the one hand and avoiding unduly severe implications on national banking systems and the real economy. With respect to the much debated phasing-in and transition arrangements, in my view they are realistic. Since the start of the crisis banks have significantly raised their capital levels, and in order for the banks to meet the new standards, large bank will need to raise a significant amount of further capital. Therefore, a reasonable balance was found between country specific considerations and the need to achieve a consistent international application of measures without hampering the economic recovery. And I think, broadly speaking, the right balance has been found. Besides the swift implementation of the Basel rules, I see a critical priority as well in the field of reforming financial institution’s corporate governance and risk management practises.
Turning to Europe, I would like to highlight two main policy actions that should be considered of utmost priority.
First, the starting of the ESRB and the European Supervisory Authorities. The agreement reached on the legislative package concerning the ESRB and the ESAs is strongly welcomed by the ECB. The ECB shall ensure a Secretariat and thereby provide analytical, statistical, logistical and administrative support to the ESRB. As the time of the establishment of the ESRB is approaching, the ECB is now getting ready to support the new body which will become operational as of 1 January next year. In particular, we need to ensure the availability of critical data and information, which will be a crucial basis for any future detection and analysis of systemic risk. In this regard, it will also be essential to further develop modern tools for the measurement and the early warning of systemic risk.
Second, the enhancement of the EU crisis management and resolution framework. The ECB follows with particular attention all the ongoing initiatives aiming at introducing fundamental changes to the financial stability arrangements. In forthcoming weeks, the Commission is expected to release a new communication on crisis management including many proposals for a fundamental reform, which will inevitably imply - in the medium term - important changes in the national legal frameworks. I strongly support the efforts of the Commission as I think that a sound framework on crisis management that would strengthen and harmonise the powers of the authorities and improve the institutional setting (e.g. the establishment of the Cross Border Financial Stability Groups) and other elements, including the possible set up of resolution funds under a harmonised framework of operation are necessary steps in view of enhancing the crisis management and resolution framework.
2. OTC Derivative regulation
Let me turn to the second major priority: the strengthening of market infrastructures to increase market transparency and to limit contagion.
One specific priority in this regard for the coming months is the timely adoption and implementation of a new EU regulatory framework for OTC derivatives central counterparties and trade repositories. The issue is urgent both to enhance the use of these infrastructures and to ensure their safe and efficient functioning. The recently issued Commission legislative proposal is an important step towards achieving these objectives. At the same time, the ECB still sees a need for improvement of the draft regulation. Let me just highlight three of them.
First, while access to central bank liquidity is a particularly robust arrangement for enhancing the liquidity resilience of CCPs, it is crucial to keep in mind that the decision to grant such access has to remain entirely subject to central banking discretion, owing to the potential for direct monetary policy implications. In this regard, let me recall that the first line of defence, including for distressed market conditions, must always be the appropriate liquidity risk management of the CCPs themselves.
Second, existing responsibilities with regard to CCPs need to be regarded. Given that CCPs are subject to various types of regulation, oversight and supervision, it would not be appropriate to confer major EU decision-making powers, such as for the specification of prudential requirements and for the recognition of third country CCPs, to a single EU body that does not fully reflect and represent these different functions. In particular, ESMA should closely cooperate with the ESCB on all oversight-related matters.
Third, given the critical importance of a global regulatory level playing field for both CCPs and trade repositories, EU rules should go much further in requiring, in the course of their specification through implementing measures, close convergence with the existing global standards for financial market infrastructures. Again in close cooperation with the ESCB.
3. SEPA end date regulation.
Turning to the third major priority: a harmonized and integrated retail payment market through the implementation of the Single Euro Payments Area (SEPA)
The Single Euro Payments Area (SEPA) – which the ECB promotes together with the European Commission - will enable customers to make cashless payments throughout the euro area with a single set of payment instruments. The ECOFIN Council has recognized in March last year that the cost savings to business and consumers can amount up to EUR 18 bn annually.
Despite the substantial benefits of the SEPA project, migration has been very slow; figures from June 2010 show that only 8.8% of all euro area credit transfers were processed as SEPA credit transfers and only 0.05% of all euro area direct debits were processed as SEPA direct debits.
In fact, we see that the migration to SEPA in a self-regulated way has not achieved the required results. The banking industry’s self-imposed deadline of December 2010 for SEPA instruments to be in general usage will not be met.
Therefore, the Eurosystem has now for some time emphasised the need for a realistic but ambitious end date to be set for the migration to SEPA credit transfer and SEPA direct debit, in order to fully reap the benefits of SEPA.
To ensure the materialisation of SEPA benefits, a migration end date by regulation for SEPA credit transfer and SEPA direct debit is necessary and should be set by the EU legislator. The Eurosystem does, therefore, welcome and support the Commission’s suggestion to introduce an end-date for migration to SEPA credit transfers and SEPA direct debits by means of an EU regulation. If the Commission decides to move forward by presenting a legal proposal for setting an end date, I would like to emphasise the importance of a wide support and a smooth adoption. I, therefore, hope that the Belgian Presidency, EU Member States and the EU Parliament would give any legal proposal high priority and due attention. A legally binding instrument is from my point of view necessary for a successful migration to SEPA as the project would otherwise face the risk of failure.