Jean-Claude Trichet: Intervention at the Eurofi Financial Forum 2011
Speech by Jean-Claude Trichet, President of the European Central Bank, at the Eurofi
Financial Forum 2011, Wroclaw, 15 September 2011.
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Ladies and gentlemen,
It is a great pleasure for me to be back here at the Eurofi Financial Forum.
These events always provide a very good opportunity to exchange views on issues that are
central to the effective functioning of the financial sector and its key task of supporting
sustainable growth in the real economy.
As we are all well aware, this is a very challenging time for the advanced economies. We
avoided a dramatic economic depression in the autumn of 2008 - following the collapse of
Lehman Brothers three years ago to this very day. But we still have a long way to go to move
beyond this crisis.
At the Pittsburgh Summit two years ago, the G20 leaders reiterated their promise to do
"everything necessary to ensure recovery, to repair our financial systems and to maintain the
global flow of capital". Now, more than ever, we need to make significant progress in
delivering on those promises.
Today, I would like to focus on what has been achieved so far by our collective efforts to
repair our financial systems - in particular, the establishment of the new European
supervisory structure, the agreement on Basel III and the global framework for systemically
important financial institutions (SIFIs).
But I also want to look at the road ahead: we must not stop here and leave our task
halffinished.
There is still very important work to be done on a number of regulatory challenges.
And with all our reforms and with all our new institutions of economic and financial
governance, we must ensure timely implementation so that we can ensure that we have
done everything to make a difference as regards the resilience of the global, regional and
national financial systems.
The ESRB
Let me start with some of our accomplishments before moving on to highlight some key
areas where we need to make progress. The first accomplishment is the establishment of the
European Systemic Risk Board (ESRB) earlier this year. As you know, the ESRB brings
together the policy makers such as central banks, supervisors and the Commission, thus
fostering a broad-based review of risks and vulnerabilities and a deeper understanding of
interlinkages and spillovers between different parts of the financial system. This wide-ranging
perspective, which encompasses both micro and macro elements, is an essential feature of
the new European supervisory framework and it fills a gap identified at the global level.
Although the ESRB does not have direct binding powers, the effectiveness of its "comply or
explain" mechanism builds upon the high reputation of the ESRB's members and the quality
of its analysis.
In its last meeting in June, the ESRB underlined the threat to financial stability stemming
from the interplay between the vulnerabilities of public finances in certain EU Member States
and the banking system, with potential contagion effects across the Union and beyond. To
ensure the resilience of the EU financial system and limit the potential for adverse spillovers,
the ESRB at the time also stated that backstop plans should exist, starting with resources
from private markets and, if necessary, with public funds.
As we also said at the time, we are furthermore working on specific issues such as FX
lending, complex financial products and mismatches in the funding structure between various
currencies. Let me mention that we have our next ESRB General Board meeting next
Wednesday.
Basel III implementation
As regards Basel III, compared with Basel II, the new framework envisages higher minimum
capital requirements, better risk capture, stricter definition of eligible capital elements and
more transparency. These elements should substantially improve banks' capital position and
loss absorbing capacity, thus enhancing the resilience of the financial sector.
The new Basel framework also introduces entirely new concepts, such as a non-risk-based
leverage ratio and mandatory liquidity requirements. It has been agreed that these measures
will be introduced gradually during a transition period. It is essential that prior to their
introduction the potential impacts of these new elements on financial markets are carefully
assessed to ensure that these measures do not hinder banks providing funding to the real
economy.
A major challenge ahead is the consistent and timely implementation of the Basel III
framework. It is of the essence that we all adhere to the agreed timeline, ensuring that our
banks have a strong capital base. Only when implemented in a consistent manner across
jurisdictions will the expected significant net social benefits, including reduced volatility of
credit and GDP growth as well as the lower probability of occurrence of systemic crises, be
achieved. To reap the benefits of the new framework, a consistent implementation of
Basel III is essential.
In this context, I welcome the European Commission's proposal on the implementation of
Basel III in the EU, issued in July in the form of a fully-fledged capital requirements
regulation.
With this step, the EU has demonstrated its strong commitment to the rapid implementation
of the Basel III agreement. As it was already said earlier in this Eurofi colloquium, great
attention is presently given to this very important piece of legislation, to verify and make sure
that it is fully in line with the agreements reached at global level through the
Basel Committee, the FSB and the G20. I am confident that this work will be satisfactorily
concluded.
SIFIS
Another important step taken to strengthen the resilience of the financial markets is the
agreement reached on global systemically important financial institutions. A key lesson from
the crisis is that incentives need to be put in place for banks to reduce their "systemic
footprint".
So I am very pleased that at end-June this year the Group of Governors and Heads of
Supervision, which I had the privilege to chair, adopted the consultative document regarding
global systemically important banks. The envisaged measures have several objectives.
These objectives include reducing the probability of an adverse event occurring, reducing the
extent or impact of the failure of a systemically important bank and reducing the cost to the
public sector.
The framework is built on two building blocks that increase the loss absorbency of global
systemically important banks. The first building block is a gradual capital surcharge based on
the degree of systemic importance, ranging from 1% to 2.5 % of risk weighted assets.
The second building block is that the additional capital requirements have to be met with
common equity. The unambiguous choice of common equity as the unique instrument to
meet the capital surcharge should ensure robustness. These measures complemented with
supervisory judgement should capture structural and cyclical changes in the banking system.
Shadow banking
The introduction of more stringent capital requirements for credit institutions under Basel III
as well as the requirements for global systemically important banks, may provide incentives
for banks to shift part of their activities outside the regulatory perimeter. It is therefore
decisive that we continue our work to improve our capacity to identify and assess the
potential risks stemming from the shadow banking system.
We need to develop a better understanding of the interconnections between regulated and
non-regulated entities. We also need to explore the possible channels of contagion that may
result in adverse market dynamics. Gaining a better understanding of the functioning of the
shadow banking system is a key element of and a precondition for improving the efficiency of
financial regulation and supervision across markets and jurisdiction.
I strongly encourage the FSB to continue to work very actively on all of its work streams
regarding the regulation of the non-banking sector. This includes regulatory reform of money
market funds, securitisation and the interaction with the banking sector. I am looking forward
to the progress report to be delivered for the G20 meeting in October.
Further regulatory challenges
In a number of key domains, decisions have been taken by the international community. It is
no time to challenge them. It is time to implement.
In a crisis period where confidence is of the essence, it would be extremely damaging if the
authorities were to hesitate, demonstrate an absence of resolve and of the fortitude that is
required by the circumstances. I see resistance of some in the financial sector against Basel III.
I see similar messages on the SIFIs. For me, it is crystal clear: what has been decided is
decided.
But there are other areas of regulatory reform where work is still underway. Let me briefly
highlight two key areas on which we need to stay committed and where swift progress is of
the essence.
First, there is the review of the Markets in Financial Instrument Directive (MiFID), on which a
proposal is expected to be released by the European Commission this autumn, will represent
a key step in the right direction. Amending the MiFID should enable the EU regulatory
framework to keep pace with financial innovation while responding to the G20 commitments
to deal with less regulated and more opaque parts of the financial system.
Second, it is key that transparency is enhanced across the board: with regard to markets,
institutions and products. Lack of information contributes to the mispricing of risks, mistrust
among market participants can turn situations into downturns. In order to build confidence
and contribute towards the stability of markets it is important that financial innovation and
technological advances contribute to the ability of financial markets to sustainably provide
financial services to the real economy. We need to establish a harmonised framework that
enables coordinated action, increases transparency and reduces the risks posed by these
market practices. Moreover, we need to better identify, monitor and assess the potential
threat to market stability posed by High Frequency Trading.
The IOSCO consultation on Regulatory Issues Raised by the Impact of Technological
Changes on Market Integrity, carried out in response to a G20 Leaders request during the
Seoul Summit in 2010, recalls that "the benefits from technological advances should not
overshadow the risks that these innovations pose to the efficiency and integrity of markets.
These changes raise issues that should be addressed by regulators in order to maintain the
integrity of financial markets." IOSCO is currently assessing the responses to this
Consultation and steps that could be taken to help mitigate these possible risks. I look
forward to the report for the G20 Finance Ministers in October.
Conclusion
In conclusion I would like to send these messages and make a comment on the central
banks role in present time:
My first message is to underline once again that all what has been decided has to be
implemented strictly, comprehensively, and fully. As the continuous challenges demonstrate
clearly, we are not back to "business as usual" as some thought some months ago. We need
resolve and fortitude of the public authorities and lucidity on the part of the private sector.
Secondly, a lot remains to be done. No complacency should be tolerated in any field. And I
cannot help saying that on top of what is clearly identified by the international community as
the urgent issues in discussion in the Financial Stability Board, we are far from
understanding the potential global systemic instability that is associated today with the sheer
size of the non-banking sector which experienced an exponential growth over the last
20 years. I would call all of us to better understand this aspect of the global financial
dynamics.
Thirdly, more directly linked to the present tensions in the European sovereign debt, I would
only remind all of us that the central banks - and the ECB in particular but with all others -
have called permanently for sound fiscal management, sound economic policies and
structural reforms, strict implementation and reinforcement of the European economic and
fiscal governance - tirelessly, not only in stress times, but also in times of generalised benign
neglect of both governments and markets. We call all authorities to implement swiftly all
decisions and to be constantly ahead of the curve. As institutions that are independent, that
are devoted to stability and that are medium- to long-term oriented, central banks are more
than ever an anchor of stability and confidence. This is especially the case in an environment
which is turbulent since 4 years, in open crisis of the financial sector since 3 years - shall I
say exactly 3 years - and in a market environment characterised by acute tensions of some
sovereign signatures in the advanced economies since one year and a half. It is exactly what
is inspiring the Governing Council and the General Council of the ECB: to offer the most solid
anchor of stability possible to all economic agents and, overall, to our own people. For in very
difficult times, all depends on the confidence of our fellow citizens. It is what is inspiring the
27 central banks of the European Union. It is what is inspiring the sister central banks in all
the world.
We are just coming from Basel, the BIS headquarters. Reporting to the press on the Global
Economy Meeting, I stressed that we were all very closely "united in purpose": each of us in
our own economy, with their different features and challenges, striving to solidly anchor
inflation expectations, preserve stability and consolidate confidence.
The globally co-ordinated decision we published this afternoon on US dollar
liquidityproviding operations is a clear illustration of our very close cooperation at the global level and
of the "unity in purpose" that I was mentioning last Monday.
I thank you very much for your attention.