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Global Official Institutions Conference, 22 June 2023
Building together a future-proof banking and payment sector in Europe
Speech by François Villeroy de Galhau,
Governor of the Banque de France
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Ladies and Gentlemen,
I am pleased to be with you for this Global Official Institutions Conference
organised by BNPP, and I extend my warmest thanks to Jean Lemierre,
Chairman of BNPP's board of directors, for his invitation to give this speech.
Facing the obvious turbulence and challenges of the last 18 months, we come
here from different perspectives. Let me focus nevertheless on some common
features: I will take the European view, and not only the French one. And I will
focus on two delicate interactions between public authorities and private sector
financial institutions:
-the first one is about the recent past: why did the euro area escape the
banking turmoil born in the US and in Switzerland, and can we be safe
enough? (I)
-the second one is about the next future: why should Central banks stand
ready to issue a digital currency? (II)
I. Banking turmoil: three blessings and a funeral
I spoke after SVB's failure of 'Three blessings and a funeral'. Let me start with
the funeral, at least the one that we can welcome, but which, unfortunately, is
not final. It should be the condemnation and the funeral of mismanagement.
Blatant mismanagement of the risks and of the business model in some banks
explains first and foremost the recent turmoil. It must be reiterated, SVB's
business model was fortunately an outlier, and the rise in interest rates generally
benefits European banks, thanks to their diversified deposit base and large loan
portfolio. As president of the French prudential authority, I can attest to French
banks' robustness: their net banking income increased by 5.3% in 2022, and
their revenues remain on a high track in 2023.
After the (temporary, alas) funeral, let me come to the three blessings. This word
is a bit self-centred, I confess, since I am referring to public policies. But the
blessings refer first to two reasons why the US banking crises did not affect the
euro area this time: our regulation, and our supervision. As regards regulation,
Basel III in its entirety applies to all European banks, but only to 13 banks in the
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United States. According to a number of estimates, including our own, SVB's
short-term liquidity ratio (LCR), had it been applicable, would have been below
the 100% requirement, which would have been an early warning signal - for
memory's sake, all liquid assets are booked at fair market value in this ratio. The
priority is therefore not to keep reworking the Basel requirements - and thus
delaying their implementation - but to implement them everywhere and quickly,
as the Fed Vice Chair's - Michael Barr - report suggested it in April. In short,
more Basel III now, rather than a hypothetical and delayed Basel IV. However,
there are two issues to consider: the increased speed of deposit withdrawals -
connected with digitalisation and social networks - raises new challenges. None
of the ideas put forward on this subject are clear-cut, but none should be taboo.
Moreover, the lack of liquidity and transparency in the single-issuer CDS market
must no longer give rise to systemic risks: as a first step, we must ensure a
better understanding of the transactions, the participants and the correlation risk
with other financial instruments.
Let me now turn to supervision. Why did Credit Suisse fail despite meeting the
requirements of Basel III? The answer is clear: good regulation is necessary;
but it is never enough. A Highway Code - regulations -, even the best one in the
world, will only be effective if the traffic police - supervisors - are efficient. Risks
generated by specific business models should lead to stricter requirements. This
is precisely the spirit of "Pillar 2" of the Basel framework. Supervision can and
must be responsive, intrusive - including with on-site inspections -, exercised by
highly qualified professionals, and applied forcefully. This is not wishful thinking:
this active supervision is one of the greatest success stories of our European
Banking Union. The SSM demonstrates the benefits of bringing all players under
one main authority only, rather than regional ones, with clearly defined
responsibilities and coordination. Furthermore, our active supervision
demonstrates the strong value of regular stress tests, which are this year
typically based on a sharp rise in short and long-term interest rates: this is the
way we in Europe already deal actively with IRRBB, including for smaller
institutions.
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Resolution is the third 'blessing', also less operational. The fact that the Swiss
authorities opted for a merger in the case of Credit Suisse raised new questions
about how to make resolution more reliable. Let me share just some thoughts
at this point. The first concerns the resolution of large or even systemically
important banks. The provision of potentially significant amounts of liquidity in
times of crisis is a prerequisite for successful resolution. The framework for the
ECB to provide "Eurosystem resolution liquidity" has yet to be built. The other
priority, at the other end of the spectrum, is to shift from resolution "for a minority"
- a far too small minority of cases: two in the last nine years - to resolution "for
the majority" of cases, including small and medium-sized banks. The European
Commission's proposal for a revised crisis management and deposit insurance
(CMDI) framework is a step in the right direction. Yet, level-playing field must be
ensured not to give unfair advantage to smaller banks; and greater pooling
between the Resolution Fund and deposit guarantee schemes should not lead
to large companies potentially benefiting from the same protection as the
smaller deposits of individuals or SMEs.
II. The digital currency for a changing world
Let me now turn to my second topic: the technological evolutions underway in
the fields of finance and payments, which has led us, the Eurosystem, to have
launched an investigation phase on a retail central bank digital currency (CBDC)
under the sponsorship of President Christine Lagarde and my friend and
colleague Fabio Panetta. Pending an approval by the Governing Council, a
preparation phase will then start at the end of this year, before a potential and
gradual launch from 2027 or 2028 onwards. I am aware I am entering here a
less consensual ground, listening to banks' doubts along two arguments (i) the
CBDC would be a 'solution in search of a problem', the 'why?' question (ii) and
the CBDC would be a competitor to commercial bank money.
The purpose: a digital banknote
About the 'why?', I can imagine that two centuries ago, there were many voices
questioning the need for a paper banknote - at that time a huge technical
innovation - to be issued along the good old gold and silver coins. Today, it all
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boils down to one simple question: as everything is becoming digital, why should
central bank money be the only thing to remain in paper? As many of you know,
central banks have also - and fortunately so - innovation in their DNAi, keeping
pace with technological disruptions. The Eurosystem has made headway on the
design of the digital euro,ii including through regular exchanges with consumer
associations, merchants and financial players, and the testing of dedicated
prototypes.iii
To put it in a nutshell, the e-euro will be a digital banknote, or 'Cash+'. Naturally,
it will feature the same characteristics as existing cash. Notably, it will ensure
privacy,iv with the offline functionality ensuring the highest level of confidentiality;
it will be the safest of assets; thanks to its likely legal tender statusv, it will be
accepted everywhere across the euro area; and its basic functionalities will be
free of charge for individuals.vi But 'Cash+', bringing significant advantages
compared with banknotes: it will allow each and every one to use central bank
money in e-commerce, in remote peer-to-peer payments, as well as for
conditional payments.
I think it's our duty to build this capacity for our fellow citizens, but it will be their
freedom to use it. The digital euro will offer European citizens an additional
option in the way they make purchases and transactions, and they will determine
the pace of its development, and its 'market share'. A digital euro will not replace
physical cash or other forms of money, and this brings me to this alleged
'competition' issue.
Money is and will remain a public-private partnership
For a long time now, money has been a public-private partnership. We need the
skills of both sides: the agility, innovations, customer relations of commercial
banks; and the trust and stability guaranteed by Central banks. Yes, digital
commercial bank money already exists, and is usually regarded as safe as
central bank money; it will remain very significant in payment amounts, and you
may possibly develop tokenised deposits. But the trust commercial bank money
inspires is not only due to each bank's private signature; it's anchored by its full
equivalence and permanent convertibility, 1:1, to the public money issued by the
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Central bank. Loosing this public anchor - in a world of digital payments without
CBDC - would sooner or later mean undermining this private trust; think of the
19th century in the United States, before the Fed, where there were regularly
confidence crises.
To make it crystal-clear, a digital euro will not lead to disintermediation. It will be
distributed through banks: we central banks have absolutely no intention to open
private accounts. In response to some other worries, there will be no financial
stability risks, due to possible significant outflows from commercial bank money
to central bank money: a holding limit will apply to digital euro accounts, and it
will ensure that the digital euro serves as a payment means, more than as a
store of value.
So commercial banks can and should get on board with full confidence. We are,
in this 21st century as in the two previous ones, complementary and not
competitors on money and payments. As said, it's very probably our duty to
issue a CBDC, but it's our will to issue it with you, commercial banks, and not
against you.
Developing a scheme of shared benefits for all stakeholders
More generally, I would like to insist that there can be benefits for every
stakeholder along the chain. The 'economic equation' can be worked out so that
each and every one - including banks and merchants - has a direct interest in
being part of it, like for cash issuance today. We are well aware that, to quote
the words of our host, payments have gone from being a simple convenience to
a central element of banks' relationships with their customers, and we strongly
desire that this will continue to be the case.
The European payment ecosystem as a whole will also benefit from the digital
euro, rather than giving ground to so called 'stablecoins' probably issued by non-
European players.vii
The scheme we are currently developing will enable the
emergence of open acceptance standards on a pan-European scale, fostering
convergence and enabling all players to build further innovations on common
ground. In short, a digital euro will act as a 'platform for innovation'viii - including
for solutions in commercial bank money, which will benefit from the acceptance
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standards of the digital euro. Let me stress in this regard that for instance the
European Payment Initiative (EPI), which we strongly support, successfully
tested and integrated the digital euro during the prototyping exercise organised
by the Eurosystem over the past few months. This success should urge
European banks to join both initiatives and related working groups.
In the same spirit, we - Banque de France and ECB - are actively working with
financial institutions on wholesale CBDC. Our shared purpose is twofold:
fostering tokenised finance and tokenised securities; facilitating cross-border
interoperability. We will publish an update of our wholesale experiments by early
July.
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The two topics I have touched upon today may seem hardly connected to one
another, but they actually have something very strong in common: ensuring the
European banking and payment sector is fit for purpose in a rapidly changing
technological landscape. Looking ahead, as Abraham Lincoln once put it, 'the
best way to predict the future is to create it'. Let us do it together, as talented
and committed Europeans. I thank you for your attention.