Today, I would like to set out my approach to regulating Europe’s banking sector. Subdued global growth, Britain’s referendum result and last week’s American election – all mean I do so against a backdrop of increased uncertainty. This environment makes the need for predictable, level-headed policy more important than ever.
Banks have a fundamental role to play in our society. We depend on their lending for companies to invest, remain competitive and sell into bigger markets, and so that households can plan ahead. In practice, this means the European Commission is focused on maintaining a regulatory framework that encourages a banking sector that is stable, sustainable, diverse and integrated.
By sustainable, I mean banks that are able to earn fair returns on their investments, compete internationally and therefore maintain and expand lending to the wider economy.
But if this is our approach, if these are the objectives our framework needs to support, we should be clear on our banking sector’s performance, and tackle head-on the significant challenges it still faces.
Monetary policy has helped improve credit growth in Europe. In the euro area, the European Central Bank has provided abundant liquidity, including through long-term refinancing operations. It launched a large asset purchase programme and cut interests rates to record-low levels. Elsewhere in the EU, central banks are also pursuing accommodative monetary policies.
This environment means banks across Europe are updating their business models. At the moment, it is clear that parts of our banking sector do not have the scale, or in some cases the expertise, to make the most of technological change. Digital payments and other innovations are developing rapidly. European banks will have to seize on digital innovations and work them into their business models.
A strong banking sector in Europe is a diverse banking sector. We need small banks servicing local communities and businesses. And larger banks operating and lending right across the single market. If we are serious about wanting an integrated sector to absorb shocks and facilitate the transmission of monetary policy – we need a clear European framework.
My goal is to strengthen confidence and stability in the sector, by building on our new regulatory architecture to reduce risk and complete the Banking Union. At the same time, we need to adjust our framework where necessary. To make it more proportionate and growth friendly.
We will introduce a binding leverage ratio of 3%. Cheap credit can give rise to excessive leverage building up in the financial system. Banks have learnt that lesson from the financial crisis. To avoid repeating past mistakes, we will add the leverage ratio alongside risk-based own funds requirement in the CRR. Put simply, this leverage ratio will act as a backstop to banks’ internal model based capital requirements. We remain fully engaged in ongoing Basel committee discussion on the appropriate leverage ratio for GSIBs and make sure any agreement is applied in a way that works for Europe.
We will propose to introduce a ‘SME supporting factor’ to all SME loans and to apply similar measures to infrastructure finance. We will propose bank capital charges for investments in infrastructure projects to be reduced, providing these comply with criteria which lower risk profiles and increase the predictability of cash flows.
Beyond our upcoming proposals, the completion of the Banking Union remains a priority. We need it for a coherent and predictable regulatory framework, but also to support integrated banking markets across the EU.
Through the European Semester process, we have made Country Specific Recommendations to six Member States to address NPLs. And we are working with national authorities to find tailor-made solutions in the framework of the existing rules on bank resolution and state aid. As part of the mid-term review of the Capital Markets Union, the Commission will assess the case for the development of a secondary market for distressed debt.
And one I believe can make a real difference to supporting sustainable growth and jobs across the EU.