Jean-Claude Trichet: Towards the review of the Lamfalussy approach - market
developments, supervisory challenges and institutional arrangements
Keynote speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the First
CEBS Conference, London, 9 May 2007.
* * *
Ladies and gentlemen,
It is a great pleasure for me to be here today at the first conference of the Committee of European
Banking Supervisors (CEBS) and to share with you some thoughts at this particular time when market
developments are underscoring the importance of making rapid progress towards a convergent
supervisory framework. Not least, this time is also appropriate for such an exchange of views given the
upcoming assessment of the functioning of the Lamfalussy approach.
Let me begin by recalling that the ECB has been a strong supporter of the Lamfalussy approach from
the outset, i.e. since 2001, when this new institutional framework for financial regulation and
supervision was first introduced. We also welcomed the extension of the approach to all financial
sectors with a view to reaping the expected benefits, across the entire financial system, of more
flexible and transparent legislative procedures and greater regulatory and supervisory convergence
and cooperation. Since then, the ECB has been closely monitoring the efforts to enhance the EU
framework for banking supervision. It is now time, as the CEBS completes more than three years of
successful operation, to take a step back to evaluate the progress that has been made and to identify
the key issues on the way forward.
I will organise my remarks in three parts. In the first, I will analyse some developments in the EU
banking sector with a particular focus on integration and cross-border banking activities. I will then
review the main objectives and related challenges for the supervisory framework in relation to these
market developments. Finally, I will assess the progress achieved with the supervisory responses so
far and point to some elements of the way forward.
Developments in the EU banking sector
Among the many developments in the EU banking sector over the past few years, I would like to
highlight two, given their relevance for the supervisory framework.
First, the process of financial integration has advanced more slowly in the banking sector than in
other segments of the financial system, namely the money, bond and equity markets. This is also
supported by the findings of the ECB's report on "Financial integration in Europe", which we published
for the first time at the end of March. The evidence presented in the report shows in particular that the
retail component of banking business is the least integrated. Looking at price-based indicators, the
cross-country dispersion of bank interest rates has remained relatively high, in particular for consumer
loans (160 basis points). As to quantity-based indicators, while the cross-border component in banks'
capital-market related and interbank holdings has increased over time - reaching 51% and 33% in
2006 - the respective share in loans to corporations and households has more or less stagnated,
accounting for only 4% in 2006.
As we know, the pursuit of further integration in retail banking, and retail finance more generally, is one
of the main objectives - fully shared by the ECB - of the European Commission's financial services
policy in the coming years, as evidenced also by the recently issued Commission's Green Paper on
retail financial services. While the achievement of the financial integration objective is fundamentally a
market driven-process, public action is also required to establish and preserve a favourable
framework. In this context, the supervisory setting in the EU is one factor - although not the only one -
which is necessary to permit and facilitate further banking integration.
Second, the internationalisation of EU banking groups has increased in recent years. This has
resulted, to a large extent, from cross-border mergers and acquisitions within the EU. The share of
such transactions in the total value of M&A transactions performed by EU banks has risen to 36% in
the years 2005-2006, from an average of 19% in the four preceding years. This intensified
crossborder M&A activity was largely driven by some key, large-scale transactions. One can easily recall, to
mention just a few, the acquisition of HypoVereinsbank by Unicredit in 2005 and the take-over of
Banca Nazionale del Lavoro by BNP Paribas in 2006.
In this context, it is interesting to consider also the findings from a mapping exercise of EU banking
groups with significant cross-border activity which has been carried out by the Banking
Supervision Committee of the European System of Central Banks for the years 2001, 2003 and 2005.
While the number of the groups included in the analysis increased only slightly - from 41 to 46
between the years 2001 and 2005 - the consolidated assets of the sample as a whole grew by 54%
during this period, and its share in overall consolidated EU banking assets increased from around 54%
to 68%. This indicates that EU banks with significant cross-border activity hold a sizable - and rising -
share of total EU banking assets.
As one looks at the data in more detail, it emerges that the intensity and geographical scope of foreign
activity varies considerably among banks. A simple measure of this, referring to the banking activity
performed within the EU and based on 2005 data, shows that only 16 banking groups out of 46 hold
at least 25% of their EU assets outside their home country and are present in at least 25% (i.e. six) of
the other 24 EU countries. These 16 groups - which could be labelled "key cross-border players" -
account for around one-third of total EU banking assets, hold on average 38% of their EU assets
abroad and are present in almost half (44%) of the other EU countries. This indicates that there is
ample room for further intensification of cross-border banking activities in the EU. The EU supervisory
framework has an important role to play in this regard. Let me elaborate on this aspect.
Supervision of cross-border banking groups
A first consideration is that the supervisory framework in the EU should be supportive of a
market-led process of cross-border banking as a driver of further banking integration.
Crossborder banks may act, via their expansion across jurisdictions, as important drivers in the financial
integration process and thus contribute to enhancing the overall efficiency of the banking sector. The
supervision of cross-border banks is performed mainly on a national, stand-alone basis, which results
in a large number of partially overlapping and also potentially diverging requirements, thereby raising
the costs for banks. Moreover, cross-border banking expansion has taken place predominantly via the
establishment of foreign subsidiaries rather than branches. For the key cross-border players, for
instance, foreign subsidiaries account for 60% of total assets held abroad. This increases the overall
cost of supervision, given the evidently more far-reaching responsibilities and the correspondingly
closer involvement of supervisors. Therefore, efficient supervision at group level should be pursued,
through consistent supervisory requirements and approaches and closely coordinated measures to
fully exploit synergies.
A second consideration is that the supervisory framework in the EU should maintain its
effectiveness in safeguarding financial stability in a more integrated banking and financial sector.
When the EU arrangements for financial supervision were established, the underlying premise was
that potential disturbances at a bank would remain largely confined to the national level. We all agree
that this assumption no longer holds. Indeed, given the rising intensity and scope of the foreign
activities of EU banks, their growing degree of functional integration and the importance of intra-group
exposures, financial difficulties affecting individual group entities may spread beyond national
boundaries, and not only within the respective banking group but also across banking groups and
financial systems.
While it is recognised that measuring these potential financial stability implications is a very complex
issue, a simple way to gauge the importance of cross-border banking groups' operations for their
home and host countries is to look at their respective local market shares. In their eight home
countries, the 16 key cross-border players have on average an aggregate market share of 35%,
ranging from 16% to 64% of total domestic banking assets. In the host countries a more mixed picture
emerges. In eight host countries the key cross-border players hold on average an aggregate market
share between 37% and 63% of domestic banking assets. In nine host countries, the average
aggregate market share is still important, accounting for 10% to 29% of domestic banking assets.
Finally, in eight host countries, the average aggregate market share is at a lower level, ranging from
1% to 9%. Overall, in 60% of all EU countries at least one of the key cross-border players accounts
alone for more than 15% of domestic banking assets, and the average market share of the group with
the greatest activity in these countries is 26%.
These elements support the need for enhanced cross-border supervision at the group level. In
particular, intense cooperation and information-sharing is required, as both home and host supervisors
increasingly depend on input from their peers on developments in other group entities to adequately
assess potential risks that may affect the safety and soundness of the group as a whole or of its
individual components. Furthermore, supervisory measures should be more closely coordinated to
ensure the overall effectiveness of supervisory action.
A third consideration is that the pursuit of the two supervisory objectives I have just mentioned is a
challenging and complex endeavour. I would like to highlight four issues in this respect.
First, the increasing intensity and scope of the foreign activities of EU banks inevitably leads to
additional practical challenges for supervision at cross-border level, which in turn increases the need
to ensure convergence of day-to-day supervisory practices.
Second, it may at times be difficult to resolve differences of opinion stemming from different attitudes
of supervisors. For instance, progress in supervisory cooperation and convergence may require
different degrees of adjustment in the supervisory frameworks of the concerned countries, given their
varying starting points. Moreover, the time and resources devoted by supervisors to improving
crossborder supervision may vary, depending on the particular structure of a banking group and the
geographical distribution of its activities.
Referring again to the key cross-border players, there are host countries with large domestic banking
systems, where a foreign establishment is very important for the group as a whole - accounting for
20% to 40% of total group assets - while it is much less significant for the host country concerned.
Conversely, there are cases where a foreign establishment holds more than 20% of the respective
host country's banking assets, but accounts for less than 5% of group assets. This phenomenon
presents itself especially in smaller host countries. But it could become more widespread if the
recently observed trend towards large scale cross-border M&A operations with major domestic players
in the host countries continues in the coming years.
Third, there is an increasing need for co-operation between EU and third country banking supervisors.
This stems from the fact that the more internationally active EU banking groups perform a significant
part of their foreign activities not only within the EU, but also in other countries. For instance, the
foreign assets held by the key cross-border players in non-EU countries account on average for 29%
of the total foreign assets of these groups, reaching up to 53% in one case.
Finally, there is a need also for enhanced co-operation between supervisors on a cross-sector basis,
given that many EU banking groups are active in other segments of the financial system, namely
insurance and securities. For instance, seven out of the 16 key cross-border players have also been
identified by the European Commission as "financial conglomerates" in accordance with the Financial
Conglomerates Directive.
Progress to date and the way forward
I would like now to move on to the question of how the work of the CEBS has contributed to pursuing
the objectives I mentioned earlier for the supervisory framework in the EU, namely to support further
cross-border banking activity and to maintain its effectiveness in safeguarding financial stability.
Overall, we can all agree that the CEBS has carried out in a relatively short time a remarkable amount
of work to foster greater convergence of supervisory requirements and approaches.
In the first instance, we can say that the CEBS has contributed significantly to the preparation of an
impressive set of supervisory guidelines which are relevant in general but in particular for the
activity of cross-border banks. This contribution is related primarily, but not exclusively, to the
supervisory implementation of the Capital Requirements Directive, covering the main elements of the
first and second pillar of the new capital adequacy framework. The CEBS guidelines on the validation
of internal-ratings based approaches and home-host cooperation are important pieces of this work
aimed at fostering a more coherent approach to cross-border supervision at the group level.
I am aware that there are different views on the extent to which the CEBS has made progress in some
areas in the pursuit of common supervisory frameworks. The common supervisory reporting
developed by the CEBS for banks' consolidated financial statements and solvency requirements is
frequently mentioned as an example of an area where it could have achieved more. In this respect, I
would highlight two aspects to place things in the right perspective. First, it is difficult to express an
objective judgement about success or failure in the field of supervisory convergence in the absence of
an agreed and shared notion of convergence. Second, the process of convergence is challenging also
because of the large variety of supervisory approaches at the outset.
In the second instance, the CEBS has undertaken initiatives to ensure that the application of the
supervisory guidelines is consistent in practice. This is a challenging objective but also one which
is crucial to determining the effects of the work on supervisory convergence. The CEBS has been
working effectively on many aspects which are important for the implementation phase, such as
supervisory disclosure, supervisory culture and the networks of competent supervisors. I regard the
establishment of operational networks as a major initiative in this respect, but we should also be aware
that it will take time to deliver results, given the complexity of supervising cross-border banks.
Overall, the work conducted so far by the CEBS to establish a common set of supervisory guidelines
and the tools to promote their consistent application across countries is to be assessed in positive
terms. However, we should remind ourselves that the pursuit of supervisory convergence in practice is
unavoidably a long-term project and thus it will be of great importance to keep momentum in the
process. To that end, I believe that all relevant stakeholders will have an important role to play along
the following lines.
First, I would underline that the ability of the current arrangements to deliver results in terms of
improved cross-border supervision ultimately depends on the institutional setting. As we know, the
CEBS is not an institutional body in its own right, but a network of national authorities. While the CEBS
- as well as the other Level 3 committees - is accountable for its achievements towards supervisory
convergence at EU level, through periodic reporting to the Financial Services Committee and the
European Parliament, its members are ultimately accountable to their national constituencies.
Although so far the CEBS members have demonstrated a strong commitment to supervisory
convergence and cooperation, a gap could emerge between aspirations towards further progress in
this area and the national mandates of the supervisory authorities.
Ultimately it will be the continuous commitment of Member States to the objective of creating a
sufficiently coherent EU framework for banking supervision which will determine the success of the
overall efforts of the CEBS. Against this background, Member States may wish to consider whether
the present entirely non-binding approach to supervisory cooperation will be sufficiently strong to
respond to the growing challenges of effective and efficient group supervision, or whether more solid
foundations may be warranted to support the work of the CEBS and the other Level 3 committees.
Ideas for strengthening cross-border cooperation among supervisors, for example by including a
specific EU-related reference in the mission statements of national supervisors and/or by allowing
qualified majority voting for decision-taking in the Level 3 committees, are already on the table. It is
certainly useful to analyse such proposals in more detail, with a view to identifying potential benefits
and other implications.
Second, I would argue in general that the outcome of the efforts towards supervisory convergence will
also be influenced by the degree of involvement of supervisors in the design of financial
regulation at the EU level. Experience with the Lamfalussy approach in the field of securities tells us
that, if the Level 3 committee - in that specific case the Committee of European Securities Regulators
(CESR) - is strongly involved in providing advice on the draft Level 2 legislation, the subsequent work
on supervisory convergence and co-operation by the committee concerned is made easier since it is
based on a common understanding among the competent supervisors of the scope and content of the
relevant provisions. As we know, in banking CEBS' involvement in providing advice on draft Level 2
legislation is limited, due to the structure of the Level 1 legislation which combines both general
principles and technical provisions. Therefore consideration could be given to extending the role of the
CEBS in this respect, also to give additional impetus to the pursuit of supervisory convergence.
Enhanced involvement of the CEBS in an advisory role in draft Level 2 legislation could also be
combined with an intensified role in removing the so-called "goldplating", namely the layers of national
legislation extending beyond the EU rules, as well as the numerous options for supervisors provided
by the current framework. In this way, a more homogeneous regulatory framework across countries
would be promoted.
Third, the success of current efforts to enhance cross-border supervision will also depend on
supervisors making the best possible efforts to ensure consistency and reduce complexity in practice.
To that end, an effective application of the principle of proportionality in supervisory cooperation
could be an important factor. While it is clear that effective and efficient supervision at group-wide level
will eventually require that all competent supervisors move in step, a more prominent role for the
supervisors of the most significant group entities, in line with the well-established supervisory principle
of proportionality, could facilitate the development of common supervisory approaches and
cooperation procedures. An effective application of the proportionality principle could also help to
reduce potential incentive problems already at an early stage by structuring supervisory relationships
in line with the relative importance of individual group entities for the group as a whole and the host
countries concerned, before entering into substantive discussions regarding best supervisory practices
and cooperation procedures.
To illustrate this point, and looking only at the distribution of assets, let us assume that a possible
threshold of at least 5% of either group assets or domestic banking assets represents a rough criterion
for identifying significant group entities. If we were to apply this criterion to the key cross-border
players, there would be on average three countries in which significant group entities were located.
This would be a significant reduction from the current average of 12 countries in which the banking
groups operate. This example is purely indicative of the possible positive effects of applying in full the
principle of proportionality in the pursuit of supervisory convergence while respecting the current
institutional framework. In practice, we all know that the identification of significant group entities is not
always straightforward, but requires a comprehensive, case-by-case, assessment of various factors,
relating especially to the internal structure of the group and the distribution of group assets across
countries, as highlighted also in the CEBS home-host guidelines.
Another important factor in further streamlining the supervisory interface for cross-border entities and
economising on supervisory resources could be a greater recourse to the cross-border delegation of
tasks, and where appropriate, responsibilities. I look forward to the results of the work that the CEBS
is conducting in this area, in line with the recommendations of the FSC report on financial supervision
which was endorsed by the ECOFIN Council on 5 May 2006.
Finally, the success of the efforts to develop a consistent supervisory framework will depend also on
an active and effective role of market participants. While supervisors should stand ready to deploy
adequate resources and make adjustments to national approaches to enhance supervisory
convergence and cooperation, initiative and commitment on the part of the banking groups themselves
is indispensable for making progress in the future. I would just recall in this context as an example that
adequate group-wide tools and procedures for risk management and the effective dissemination of
relevant information within a group are basic prerequisites for streamlined supervisory action. The
experience of the CEBS Consultative Panel and public consultations characterised by an active
involvement of market participants indicates that there is a strong will on the part of the industry to
contribute to the success of the supervisory efforts.
Conclusions
Let me briefly conclude. The CEBS has made significant progress so far and this has been
acknowledged and appreciated by all interested parties, including the ECB and the Eurosystem.
The work of the CEBS has laid the foundation for a supervisory framework in the EU which should be
able to promote on the one hand further banking and financial integration and at the same time
maintain its effectiveness in pursuing financial stability in a more integrated financial system.
The full success of the framework established by the CEBS should not be taken for granted. It will
depend on the continuous improvement of several factors including further possible progress in the
decision-making process of the CEBS, a sustained high degree of commitment on the part its
members and the necessary constructive role of market participants.
Thank you very much for your attention.