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Paris Europlace International Financial Forum Paris, 11 July 2018
Europe in a disruptive world
Opening address by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr).
Ladies and Gentlemen,
It is a pleasure to be here today to open this International Financial Forum on
"Europe in a disruptive
world". We are in 2018, in Paris. But let me first go back
several millennia, and to Mesopotamia. The invention of writing was certainly one of
the most stunning breakthroughs in the history of humanity, and in terms of
accessing and spreading knowledge. This was precisely what we can call a real
disruption. So, the French philosopher Michel Serres often compares our time of
digital revolution to the invention of writing. In my remarks today, I wish to stress that
we are now at a turning point: we are living the end of a cycle of restoring order after
the financial crisis; and we are witnessing the emergence of another cycle of
disruption in Europe.
**
I. The end of a cycle
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The issues that have dominated the post-crisis era strengthening financial
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regulation and implementing non-standard monetary policy measures are
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progressively coming to an end. The very welcome finalisation of Basel III to be
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integrated in the European legislation in a timely manner concludes a decade of
regulatory efforts on the banking system. We are obviously not done yet. Above all,
two priorities remain on the agenda: first, the European review of the Solvency II
directive on insurance; the main challenge will be to better reconcile prudential
requirements with increased investment in equity and infrastructure. Let me say it
clearly: revision cannot mean the status quo. The second priority is the regulation of
shadow banking, and first and foremost its liquidity. Indeed, the regulatory priority is
no longer the solvency of banks, but the liquidity of non-banks.
In the euro area, economic growth and inflation have been successfully supported by
our unconventional monetary policy measures. GDP per capita and employment
have overtaken their levels of 2007. The ECB Governing Council is now
implementing its strategy of gradual and predictable normalisation. Net asset
purchases should end in December; the first interest rate rise could take place at the
earliest through the summer of 2019 depending on the inflation outlook. That said,
monetary policy shouldn't remain the only game in town, and
the euro area should
equip itself with other economic instruments. A stronger economic Union is an
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efficient combination of private risk-sharing Banking Union plus Capital Markets
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Union and public risk-sharing strengthened ESM plus Budget.
The progressive end of this "restoring" cycle means that
the focus of our dialogue
between the financial industry and the public authorities will shift. It will be less on our
well-known mantras: are capital requirements too high? Are interest rates too low?
And we will hopefully focus more on the issues of tomorrow. Let me, at the start of
this new cycle of disruption, elaborate on three challenges: a new financial
constellation in Europe; new needs and new players; new technologies and hence
new regulations.
II. The beginning of another cycle?
The first challenge is the emergence of a new financial constellation in Europe.
Brexit is, and remains, bad news not only for the United Kingdom but also for Europe.
Achieving an agreement is highly desirable to protect prosperity on both sides of the
Channel: The latest efforts seem to be moving in that direction. Brexit will, however,
lead to a restructuring of the European financial system. There will not be a single
City for the continent, but rather an integrated polycentric network of financial
centres, with specialisations based on areas of expertise. This structure needs to
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help to improve the circulation of the abundant savings in the euro area a surplus
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of over EUR 400 billion channelling them more towards equity financing and
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innovation. The Capital Markets Union in Europe and what I more broadly call a
"Financing Union for Investment and Innovation in Europe" -
is even more essential
given the prospect of Brexit.
In this new environment, the euro area must keep control of the risks regarding euro-
based transactions. Some financial market infrastructure located in London will soon
become off-shore to the EU. Reducing the dependencies vis-à-vis such
infrastructures is vital for the EU both in terms of financial stability and the
transmission of monetary policy. This is the reason why the Commission proposed a
location policy for CCPs, as part of the revision of the European Market Infrastructure
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Regulation (EMIR). We like Germany and most Member States strongly support
this. It is under discussion at the European Parliament and Council. We also need to
ensure that critical actors do not become too big to fail: a monopoly for clearing
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activities serving the European financial market should be excluded. The example
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and success of the development of a competing CDS clearing offer in Paris
demonstrates that it is possible to break a monopoly if there is a convergence of wills
between players.
In this respect, Paris has numerous advantages to become a major hub for
innovation financing in Europe. France has four of the euro area's eight systemic
banks. Besides, with EUR 4 Trillion under management in the country, France's
asset management sector includes Europe's leading asset manager. The French
insurance sector represents more than one third of the insurance sector of the euro
area. I observe that beyond the legal decisions concerning European structures, an
ever-growing number of international banks are choosing to transfer the majority of
their market activities to Paris. Paris has all the qualities necessary to become the
market hub of this new constellation in the euro area.
2/ Second challenge: new needs and new players. Banking activity, as we know it,
with deposits, savings and loans, will remain key. But the payment industry, for
instance, is constantly evolving, notably with Fintechs. In the past, payments were
looked at as a technical, back office matter. No longer. We can identify three major
trends: first, instantaneity of payments "anytime anywhere"; dematerialisation; and
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finally dissemination a host of players entering the market. Against this backdrop,
there is a need to develop a genuine European industrial strategy, and European
players, within a harmonised and competitive framework. And the related business
model here is obviously different, based no longer on intermediation margins or
to which I'll
services fees, but on the value of data, return later.
Another growing need is in Europe: this is crucial in innovative
equity financing
economies. Equity financing is better suited than debt financing to the uncertain and
often long-term returns associated with innovative projects. Corporate equity in the
euro area only represents 74% of GDP, against 125% in the United States. The EU
venture capital ecosystem is still lagging behind that of the US. In 2017, venture
capitalists invested about EUR 9 billioni in the euro area, compared to EUR 60 billionii
in the US. Moreover, capital funds in the US are on average three times bigger than
European onesiii. As a result, above a certain amount, European start-ups have to
find their financing abroad, mostly in the United States. In this respect, France is
closing the gap. In 2017, the French VC ecosystem overtook that of the UK by
number of VC-backed rounds and is expected to thrive in 2018.
Last, we also have to promote the financing of green and low carbon investments,
while taking into account climate-related risks. To this end, the Banque de France
has successfully initiated the Network of Central Banks and Supervisors for Greening
the Financial System (NGFS) that is already bringing together 21 central banks,
supervisors and international organizations.
3/ Let me now turn to the third challenge of this new era: new technologies implying
new regulations. It goes without saying that French Tech is a strategic priority for
Paris: take for example the recent opening of the Station F start-up campus. But it is
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not only not mainly even a question of Fintechs: it is potentially one of Big Techs
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the huge data platforms based in the US or in China -; and it is certainly a question
for the existing large financial institutions. These incumbents now all agree that the
digital revolution is their overriding and even existential challenge. The ability of
financial institutions to retain customers, from branches to the smartphone, has been
particularly put to the test. The response must come first of all from the institutions
themselves. But regulations must also adapt: "same activity, same regulation" of
course, and the Big Techs will have to apply the same rules as banks and insurance
companies if they start to perform the same regulated financial activities.
That said, the challenge for supervisors extends beyond financial regulation alone;
the challenge is how to apply to all players, in a fair and proper manner, regulations
in three broader areas: data protection, monitoring competition and concentration,
and cyber-security. Data protection is strengthened by the entry into force of the
General Data Protection Regulation on 25 May. Competition is increasingly
"the winner takes all"
challenged by situations. Cyber-security will be one of the
priorities of the French presidency of the G7 next year. The only way to meet these
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three challenges data protection, antitrust, cybersecurity is through a much
stronger international cooperation. However, when adapting to the digital revolution,
no one should expect that these necessary regulations will protect existing situations.
Innovation is naturally the only effective response.
**
"Creativity is
To conclude, let me quote a sentence often attributed to Albert Einstein:
contagious. Pass it on."
We, at the Banque de France and at the ACPR, do not claim
to have the genius of Albert Einstein, but we have a strong desire to foster
innovation. The ACPR Fintech Innovation Unit and its task force on artificial
intelligence are a good illustration of these efforts. But it goes far beyond this: the
Banque de France is committed to be one of the best central banks for markets
within the Eurosystem. Our expertise is recognised, and supports the Paris financial
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centre. We will continue to supervise you it's our duty but equally, we are and will
continue to be your partner, and even more than that, one of your strengths. Thank
you for your attention.
i
https://blog.dealroom.co/wp-content/uploads/2018/02/Dealroom-2017-vFINAL.pdf
ii
https://www.statista.com/statistics/277501/venture-capital-amount-invested-in-the-united-states-since1995/
iii
http://europa.eu/rapid/attachment/MEMO-18-2764/en/Factsheet%20VentureEU.pdf