Keynote speech of Vice-President Valdis Dombrovskis on challenges and impacts of implementing Basel III
“Check against delivery”
Ladies and gentlemen
It is a pleasure to welcome you all today and introduce what I am sure will be a useful exchange of views and ideas.
Ten years ago, the financial and economic crisis brought widespread disruption to global markets.
The contagion spread easily into Europe’s banking sector.
It showed us why we need an integrated and stable financial system, why we should work together to reduce risks, and why we depend on a strong banking sector to fund jobs and growth.
The European banking sector is now in a much better position than ten years ago. Banks are better capitalised and more resilient in terms of liquidity.
And I am pleased to see that the high ratio of non-performing loans for all EU banks is falling back towards pre-crisis levels, in a continuing trend.
The most recent figures for the second quarter of 2019 show that the NPL ratio for the EU as a whole dropped to 2.9%.
That figure is down over a half since 2014.
This shows our progress in reducing risks in the banking sector. Now we need to maintain these positive trends.
Reaching agreement on the banking package earlier this year was a major step in the right direction and in creating the right regulatory environment.
It puts the previous set of Basel standards into proper effect.
The next step is to complete the Banking Union – and it is high time to do so.
An immediate achievable ambition is to agree on the backstop to the Single Resolution Fund.
Its operational details should be ready for the euro area summit in December, since we reached political agreement five months ago.
I trust there is strong political will to do this.
We also need to agree on the common deposit insurance scheme, or EDIS: the third pillar of the Banking Union.
This month marks four years since the Commission made its proposal to give the Banking Union stronger and more uniform insurance cover.
Later, in 2017, we presented ideas for reaching a compromise. After all this time, there is still little sign of progress.
We need to continue to work on this.
All sides should now work together to reach a fair and balanced compromise and bring EDIS into life.
Ladies and gentlemen
The interconnected nature of modern financial markets means that neither Europe nor any single country can tackle financial risks on its own.
Globalised markets and financial systems do not permit anyone to exist in isolation.
We all have a great deal to gain from integrated financial markets based on international standards that make the wider system more resilient and stable.
In short: global finance needs global rules.
This is why it is so important that we agreed on Basel III in December 2017 to finalise the post-crisis reforms of banking regulation.
It aims to restore confidence in calculating risk-based capital requirements.
Given our banks’ reliance on internal models and doubts about their reliability, this is especially important for the European Union.
As part of this, the Basel Committee agreed an output floor to limit banks using their internal models to calculate risk.
Given that this places a particular burden on European banks, we will use the full agreed phase-in period – up to the end of 2026.
Putting these rules into proper effect demonstrates our commitment to multilateralism and international regulatory cooperation.
However: for banks to compete fairly in a stable global financial system, the conditions to do so must be equal.
That is why it is essential for all major jurisdictions to implement all key elements of the Basel agreement.
The EU is committed to carrying through the final Basel III reforms faithfully.
Commission experts have taken preliminary steps towards this, asking interested parties for first views and the European Banking Authority for technical advice.
One major initiative for next year is to present a legislative proposal on the EU’s implementation of the final set of Basel III reforms.
We could be ready to do this in the second quarter of 2020.
Most recently, we opened a public consultation to gather further views and evidence on specific topics in the Basel III reform package: credit risk, operational risk, market risk, credit valuation adjustment risk, and the output floor.
Beyond these, we would welcome views on how the prudential framework can better reflect the risks associated with climate and other environmental factors.
Prudential rules could favour ‘green’ investments and loans, naturally while keeping prudential considerations in mind.
The EBA is already assessing the possibility of introducing a more risk-sensitive capital treatment of green assets, as a ‘green supporting factor’.
The consultation will feed into the Commission’s impact assessment and decision-making, along with the EBA’s advice.
I would encourage everyone to take part in the consultation and submit detailed, reasoned and quantified responses.
Our assessment will cover the potential impacts of the various elements of the reform package on the EU banking sector and the wider economy.
There will clearly be a focus on European specificities, where increases in capital requirements might have a disproportionately negative impact on some specific sectors, business models or activities.
In cases like these, it will be important to identify the reasons for possible increases, determine whether they are justified in light of the actual risks faced and to assess whether they would affect the EU economy disproportionately.
For me, it is important that EU banking regulation should continue providing the foundation for a stable banking system.
It should adequately finance a social market economy that works for Europe’s people and businesses – large and small.
In the banking package agreed earlier this year, for example, the European Parliament and Member States decided to follow the Commission’s proposal and maintain the SME supporting factor, extending it to all loans provided to SMEs.
Ladies and gentlemen
I mention proportionality a lot because it features prominently in how the EU puts international standards into practice.
We need to consider proportionality to cater for the diversity of the EU banking sector, as well as differences in bank size, complexity, business model and risk profile when applying the single rulebook.
The last review of the Capital Requirements Regulation and Directive further strengthened the rulebook’s proportionality principle, especially for smaller banks.
Finally: the future.
Have we done enough with the Basel III reforms?
Do we need to do more?
Are there any new risks or aspects that would call for more regulatory action?
Our financial system is inherently international.
It faces new challenges on a daily basis, not least from Europe’s transition to climate neutrality and the process of digitalisation.
Both of these are opportunities too, of course.
Given what we know is coming – perhaps also for what we don’t know – we will need regulatory cooperation well beyond finalising the post-crisis reforms.
After all, one of their main objectives is to create the foundation for a resilient banking system.
As a preventative measure, that will help avoid the build-up of systemic vulnerabilities. We need to be as ready as possible for all eventualities and threats, known and unknown.
As I said earlier, the crisis taught us some powerful lessons about international cooperation.
We learned the hard way that the best and only option is to work together.
Across continents, bilaterally as well as multilaterally – and based on common agreed international standards.
I am confident that today’s broad forum for discussion will provide us with invaluable input for our regulatory work in the coming months and beyond.
Thank you and I look forward to hearing your views.