Jean-Claude Trichet: Financial integration, development and stability -
lessons from the crisis (introductory remarks)
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the
conference "Financial integration and stability: the legacy of the crisis", sponsored and
organised by the European Central Bank and the European Commission, Frankfurt am Main,
12 April 2010.
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Ladies and Gentlemen,
I would like to welcome you to this conference on financial integration and stability, jointly
organised by the ECB and the European Commission. I would like to thank in particular
Commissioner Barnier for participating in this event, and his services for the smooth
coorganisation of it.
This joint conference is an illustration of the very good cooperation that exists since a long
time between the two institutions. The European Commission is in the driving seat on all
what concerns financial integration. The ECB also a strong interest in this topic, because of
the implications for the single monetary policy, our primary mandate, and also on financial
stability and the operation of payment systems, areas where we have a statutory
responsibility. The very good cooperation between our institutions has intensified in the wake
of the financial crisis. Let me just mention the recommendations and guidance we developed
in the course of last year on support measures for banks in difficulties. This joint work limited
the risk of unilateral and uncoordinated support measures by governments and was therefore
crucial in maintaining a level playing field and in preserving the Single Market.
It is a great pleasure for me to chair now the panel that will discuss some of key policy issues
raised in the two reports presented to you earlier. We have the privilege of having four
outstanding panellists with first hand experience in dealing with financial integration and
stability at the highest level.
Michel Barnier is since early this year European Commissioner for Internal Market and
Services and before that he held various ministerial posts in French cabinets, including that
of Minister of Foreign Affairs and of European Affairs.
Jaime Caruana is since April last year General Manager of the Bank for International
Settlements. Previously, he was counsellor to the Managing Director and Director of the
Monetary and Capital Market Department of the IMF. Jaime was also Governor of the Bank
of Spain, and in that capacity he served on the ECB's Governing Council.
Vikram Pandit is since end 2007 CEO of Citigroup, a truly global financial player which has a
history of being present in more than 100 countries worldwide. He took the helm of Citi at a
very difficult time, and since then has initiated a turnaround in the business model of the
bank. Before that, Vikram had a long successful career in other financial institutions,
including Morgan Stanley and Citi itself.
Alessandro Profumo has been CEO of Unicredit Group since it was founded in 1997.
Unicredit Group can probably be qualified as the quintessential European cross-border
banking group, with operations in 22 European countries and, amongst these 22, in
19 Central and Eastern European countries. Alessandro is also the President of the
European Banking Association.
The last 2 to 3 years have been especially eventful for financial integration and stability, with
once in a life-time developments. After Lehman Brothers filed for bankruptcy in September 2008,
the global financial system experienced unprecedented stress and policy makers had to
tread unknown territory in dealing with it.
The financial crisis has raised a host of policy issues that will provide food for reflection for
generations to come. I will mention a few of them to set the scene and to kick-start the
discussion.
The first set of issues relate to the developments in the late nineties and early 2000s. The
combination of high economic growth, ample liquidity, increasing financial integration and
development, and "light handed" regulation sewed the seeds of the crisis to come. I believe
that a number of people and organisations, including mine, identified vulnerabilities in the
financial system before the crisis erupted. Nevertheless, we did not anticipate the timing and
the intensity. We should ask ourselves what we missed in the run-up to the crisis and what
the lessons are for the future.
Once the crisis erupted in full force, a first casualty were the money markets, which provide
the oil to make the banking system run smoothly. Money markets came to an unprecedented
stand-still. Because they are so closely linked to monetary policy, they had shown signs of
almost full integration right after the introduction of the euro. But with the crisis, a degree of
re-segmentation took place again along national borders; and the Eurosystem had to step in
to take on the intermediation role that these markets play in normal times.
Another set of issues relate to banking. Banks expanded both across borders and financial
sectors, often combing commercial banking, investment banking and insurance business in
one and the same group. The two groups whose CEOs are in the panel are clear examples
of this evolution. But cross-border integration of rules and prudentials, including the
institutional framework, has not proceeded with the same speed and there continue to be
clear differences according to the activity type. Banking consolidation also raises sensitive
moral hazard and crisis management questions, as painfully illustrated by the crisis.
The securities markets showed strong growth in the years before the crisis and clear signs of
integration, though not to the same extent as observed in the euro money markets. With the
crisis, bond price indictors showed signs of more dispersion across countries in Europe, but
the question is whether this points to more segmented markets or rather increased risk
awareness on the part of investors. Very topical in this respect is also the CDS market and
its interaction with the underlying (sovereign) bond market. Finally, the integration of a
securities market depends to a large extent on the integration of the supporting market
infrastructure. This is an area where the Eurosystem and the European Commission have
taken significant measures, but integration continues to be affected by legal, fiscal and
technical issues.
An important set of issues on which the panellist may want to comment relate to the
regulatory reform process, where the G20 provides the strategic impetus, the Financial
Stability Board (FSB) plays an important role in policy coordination, and the Committees and
working groups (such as the Basel Committee on Banking Supervision, which is the
emblematic Global Committee) the review of specific international standards. Important
regulatory reforms are underway in Europe, as well as in the United States, and I want to
elaborate on them because they have important implications for the ECB.
As you know, the proposed reform for the financial supervisory framework in the EU will be
based on two pillars. The micro-prudential pillar, the European System of Financial
Supervisors (ESFS), will be composed of the national supervisors and three European
Supervisory Authorities (ESAs). The European Systemic Risk Board (ESRB) will form the
macro-prudential pillar.
Under the proposals of the European Commission, the ESAs will carry out a range of
activities, including the issuance of binding and non-binding rules which will provide the basis
of a so-called "single EU rulebook". The ESAs will further promote a consistent application of
EU legislation and of a common supervisory culture, and provide for mediation in the case of
disagreements between national supervisors. All this should lead to a more harmonised
regulation and supervision across countries, and as a result also foster financial integration.
For central bankers, the part of the reform which directly concerns them is the establishment
of the ESRB, a new independent body that will for the first time carry out a comprehensive
macro-prudential oversight of the financial system of the EU. The ESRB will also issue risk
warnings, and, where appropriate, recommendations, and follow up their implementation.
This body will bring together the central bankers, the heads of the three supervisory
authorities, the Commission together with the supervisors of the 27 EU Member States to
regularly discuss and assess the financial stability conditions in the EU. In that respect, the
ESRB shows some keen similarities with the Financial Stability Council in the proposed
financial reform in the United States.
The ESRB is expected to support financial integration through its contribution to financial
stability in the EU. Indeed, if market participants are confident that the authorities take
properly into account the interdependencies between countries and the various components
of the financial system, they are likely to fully exploit the possibilities offered by cross-border
activities in the EU.
On the part of the ECB, I can assure you that we stand ready to support the ESRB, in
particular taking into account the important presence of the members of the General Council
of the ECB in the ESRB and the fact that the ECB will provide the secretariat and analytical,
statistical, logistical and administrative support to the ESRB, as required under the legislative
proposals. Preparatory work at the ECB has been organised through the setting up of an ad
hoc team and is under way so that the ESRB can take up its work after its formal
establishment. The ECB is in the process of enhancing its capabilities for monitoring and
assessing financial stability risks. Only a number of weeks ago, we reformed our Directorate
Financial Stability and Supervision into a Directorate General Financial Stability with more
resources. In all this, we also try to draw as much as possible on synergies with existing work
and resources, both within the ECB and the European System of Central Banks (ESCB), the
constellation of the 27 national central banks of the European Union.
I would now turn to the panel and ask our guests to share with us their observations.