Conference of the ACPR - Palais Brongniart, 8 June 2018
The major issues at stake in the review of prudential supervision of banks
Speech by François Villeroy de Galhau,
Governor of the Banque de France,
Chairman of the Autorité de contrôle prudentiel et de résolution (ACPR)
Press contact: Mark Deen (mark.deen@banque-france.fr).
Page 1 of 6
Ladies and Gentlemen,
I am very pleased to welcome you to this conference of the Autorité de
contrôle prudentiel et de résolution
(ACPR), which this morning focuses on
major issues at stake in the review of prudential supervision of banks. The
subject is not new, but it is always topical. Let me first stress the greater
degree of security already achieved in prudential matters: the agreement of 7
December 2017 on the finalisation of Basel III and the now standard use of
macroprudential instruments. I will then touch on what remains to be done in
Europe, specifically the completion of the Banking Union, an essential step.
**
I. The implementation of the Basel III agreement of 7 December 2017
in Europe, fully respecting the envisaged timetable, is essential
The finalisation of Basel III - and not of Basel IV, definitely not - brings to an
end a decade of regulatory efforts which have considerably strengthened the
resilience of the international banking system. I reiterate that the agreement of
7 December 2017 is the best possible agreement for France and for Europe. It
is balanced and reasonable: the risk sensitivity of the prudential framework
has been preserved thanks to a large-scale retention of the internal model
approach, which was one of our main concerns. Moreover, trust in the internal
models will be strengthened by greater oversight, while the increase in capital
requirements will remain moderate and spread out until 2027. Banks were
rightly calling for long-term strategic visibility for their regulatory framework:
they now have it.
The agreement that we have negotiated relies on a strong commitment to
implementation by the main jurisdictions, including the United States. The
European Union must of course keep its word with regard to implementation
and the timetable.
Additionally, we are confident about the rapid completion of the current
discussions on the standardised approach to The first version of
market risk.
Page 2 of 6
the text, published in 2016, would have entailed ex post an unjustified and
excessive increase in the capital requirements for market activities. The ACPR
has since then actively participated in the work of the technical Market Risk
Group of the Basel Committee. The new rules proposed in the document
currently submitted for consultation should permit a return to the impacts
initially sought ex ante, i.e. an average increase of 20% to 30% in the
minimum capital requirement for market risks.
Beside regulation - thus clarified - and microprudential supervision,
macroprudential policies now round off in many countries the financial
stability trifecta. In France, the ACPR contributes actively to the discussions of
the Haut Conseil de Stabilité Financière (High Council for Financial Stability -
HCSF) chaired by the Minister for the Economy and Finance. In the face of
rapid and excessive growth in the debt of several large corporations, the
HCSF has adopted a measure which comes into force on 1 July; it imposes on
French systemic banks a limit to their exposures to the most leveraged large
non-financial resident corporations. The HCSF nevertheless remains vigilant in
the face of the rapid increase in bank lending to the private sector, which stood
at +5.5% in the first quarter of 2018. French private debt reached 130% of
GDP at end-2017, the highest of the large countries in the euro area. Since
2014, it has risen by more than 9% of GDP, while it has declined by 5.4% of
GDP on average for the euro area. The HCSF stated on 29 March that it
stands ready to act. In particular, if we have to decide, at our next meeting, on
a countercyclical capital buffer, that would evidently not be in order to stop the
lending today: it would be - as the name suggests - to avoid a credit crunch
tomorrow when there is a cyclical downturn in the economy, particularly for
small and medium-sized enterprises. Should banks lack sufficient capital, they
could manage the heightened risks thus materialising in their balance sheets
by restricting new lending. It is this excessive credit cycle - the risk of "go and
stop" seen during financial crises - that a moderate capital buffer must seek to
smooth out. It should be noted in passing that a clear majority of Member
States of the European Union have adopted other macroprudential measures
Page 3 of 6
to specifically limit residential lending, constraining households: in my view it is
out of the question in France.
II. To reduce fragmentation and improve private risk sharing in Europe,
we must now complete the Banking Union.
We must now resolutely work towards completing the European Banking
Union. I would first like to explain why. The finalisation of the Banking Union
should, alongside the Capital Markets Union, contribute to improving private
risk sharing within the euro area. Private risk sharing fulfils an economic
stabilisation function: in the United States, for example, private financial flows
between the federal states are a more powerful damper than budget
mechanisms involved in public risk sharing. Furthermore, this private risk
sharing should help to channel the euro area's large savings surplus - EUR
390 billion in 2017 - towards European companies, within a real Financing
Union for Investment and Innovation at the European level.
We have taken a step forward with the agreement of 25 May at the Ecofin
Council meeting on the "banking reform package" set out in the Commission's
legislative proposal of 23 November 2016. Even if we need to wait for the
Parliament's proposal and the outcome of the trialogue discussions, this
agreement is overall positive. On the supervision side, it provides the
European Union with all the prudential ratios of the international framework. It
also provides for the gradual introduction of the revised market risk framework,
the Fundamental Review of the Trading Book (FRTB), which is still being
finalised in Basel. In addition, a first step has been taken towards recognising
the euro area as a single jurisdiction, in which cross-border exposures within
the Banking Union are considered domestic exposures for measuring the
systemic importance of European banks. On the resolution side, we have
obtained an agreement to broaden the subordination requirement of the
Minimum Requirement for Own Funds and Eligible Liabilities (MREL) to
Page 4 of 6
beyond global systemically important banks (G-SIBs), thereby reducing the
threshold effect between G-SIBs and other banks. In addition, the text defines
a subordinated debt ceiling, very close to the international Total Loss
Absorbing Capacity (TLAC) standard.
However, this agreement contains a number of more problematic aspects
about which we shall remain vigilant. To name but one, as regards the internal
MREL, cross-border exemptions within the Banking Union similar to the
methodology for calculating the capital surcharge for systemic banks would
have been desirable. In addition, we are concerned about a reference to the
threshold allowing access to the Resolution Fund being introduced into the
calibration of the internal MREL; this makes no sense when resolution is
carried out at parent company level.
As regards the measures still needed to finalise the Banking Union,
completing the resolution framework is, in my opinion, the first priority, even
more so than deposit insurance, the third pillar of the Banking Union. Mario
Draghi was most insistent on this in his Florence speech of 11 May.i In most
large jurisdictions - the United States, the United Kingdom and Japan - the
intervention capabilities of resolution funds are not capped because they are
backstopped by the fiscal authorities, without being a burden on public
finances, since any public outlays are generally reimbursed by the private
sector. During the last financial crisis, market and depositor confidence
resulting from a credit line backstopped by the US Treasury enabled the
Federal Deposit Insurance Corporation (FDIC) to resolve 500 banks without
tapping into the resources of the safety net.ii Today, in the event of a severe
crisis in the European Banking Union, the resources of the Single Resolution
Fund (SRF) could be depleted.
This is why a common backstop for the Single Resolution Fund is urgently
needed. Let me emphasise that the aim of a common backstop is not to bail
out banks or draw on government budgets. Such a step would only be taken in
accordance with the principle of subsidiarity, and all the sums borrowed would
Page 5 of 6
be gradually repaid by the banking sector. Rather, it is about building
confidence in bank resolution in Europe by showing that it will always be able
to intervene effectively in the event of a crisis. Such a system will also
encourage the lifting of the constraints imposed by certain national authorities
on capital and liquidity flows. I regard the European Commission's proposal to
set up a backstop through a credit line provided by the European Stability
Mechanism (ESM) as a top priority. We also need a common scheme for
providing liquidity to financially sound banks after resolution which is in line
with euro area monetary policy rules.
Of course, a compromise will have to be found in order to make headway on
the third pillar of the Banking Union, deposit insurance. Once we have
completed the resolution framework, we will be less in need of a shared
European scheme. A pragmatic approach could be to introduce a system of
loans between national deposit guarantee schemes (DGS), with guarantee
mechanisms to ensure that liquidity advances do not lead to losses for the
lending DGS. This would lead to a sharing of liquidity without sharing risks,
which would be a first step towards shoring up financial sector confidence and
strengthening depositor protection.
**
To conclude, I would like to stress that the completion of the Banking Union in
Europe is one of the key elements of a broader ambition: the crucial
strengthening of Economic Union. As Mario Draghi said on 11 May: "The
people of Europe have come to know the euro and trust the euro. But they
also expect the euro to deliver the stability and prosperity it promised. So our
duty, as policymakers, is to return their trust and to address the areas of our
union that [...] are incomplete". Beyond national democratic debates - there is
no shortage of such debates today, both in Europe and elsewhere - this
confidence in the euro is our shared asset everywhere. We are bound by this
trust, while needing to respect reality, but also the urgency of time and - I think
- of History.
Page 6 of 6
i
"Risk-reducing and risk-sharing in our Monetary Union", Speech by Mario Draghi, President of the ECB, at the
European University Institute, Florence, 11 May 2018
ii
Sapir, A. and Wolff, G. (2013), "The neglected side of banking union: reshaping Europe's financial system",
note presented at the informal ECOFIN meeting in Vilnius on 14 September 2013.