François Villeroy de Galhau: Banking risks, regulations and
supervision
Introductory speech by Mr François Villeroy de Galhau, Governor of the Bank of France and
Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the ACPR
conference, Paris, Friday 16 June 2017.
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Ladies and Gentlemen,
I am delighted to welcome you to this new conference organised by the Autorité de contrôle
prudentiel et de résolution (ACPR). The three issues that will be discussed this morning -
banking risks, regulation and supervision - are all essential and are naturally highly
interdependent. To introduce this conference, I would particularly like to focus on the issue of
regulations and their impact on the financing of the economy and growth.
As you know, this is the subject we chose to address this year in the Banque de France's
Financial Stability Review, which will partly serve as a framework for your discussions this
morning. Ten years after the beginning of the financial crisis and eight years after the G20
summits in London and Pittsburgh that forged a global action plan, it is time to take stock. We
brought together 14 remarkable and complementary views for the Financial Stability Review from
public authorities, academics and industry representatives. What emerges is, to my mind, both
an achievement and a challenge.
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the banking and financial system is substantially more resilient today
I. Firstly, an achievement:
than it was ten years ago. This is thanks to unprecedented international cooperation on financial
reforms under the aegis of the Financial Stability Board and the coordination of the Basel
Committee in the banking sector, and thanks to the remarkable efforts made by the banking
industry. Thankfully, the world of finance in 2017 is not what it was in 2007.
That is particularly true for banks in Europe and in France. It is important to stress this
achievement, as the European banking sector is often criticised, particularly from the other side
of the Atlantic, solely in the light of its difficult cases or institutions that are trailing at the rear,
whereas on the whole, it is clearly far more robust than before the crisis. Banks in France for
example, have doubled their levels of capital since the crisis and generate a return on equity
(RoE) of 7%, and even up to 9% or 10% when adjusted for one-off items. As regards this return,
it is clearly lower than the pre-crisis levels, but in certain respects, this can be expected and is
reasonable. We cannot ask banks to generate a double-digit return on equity when interest rates
and the risk-free rate are so low and banks are indeed more resilient than they were. Moreover,
this improvement does not only concern the banks: it can also be seen in the non-banking sector
and the financial markets, with particular progress made with regard to over-the-counter
derivatives and the shadow banking system.
Regarding the economic consequences of the reforms, it is important first to remember the
cost of the financial crisis: according to IMF data, the total loss of global output from 2007 to 2014
amounts to 25%. Compared to this considerable loss, the potential cost of financial regulation is
very small. And above all, no one can seriously claim that in France or more generally in the
majority of advanced economies the supply of credit has been excessively constrained by
banking regulations. On the contrary, lending to the economy remains robust, with housing loans
in France up 5.6% year-on-year in April 2017 and loans to non-financial corporations up 5.4%. In
the coming months, this strong overall growth may actually warrant general vigilance and closer
scrutiny by the High Council for Financial Stability, in which I participate.
which brings me to my
II. Nevertheless, we are still faced with a challenge for the future,
second point: even if the achievement is now on solid foundations, there is clearly no room today
for complacency or respite. Although the risks of a future crisis have diminished, no one should
believe that they have disappeared entirely.
So what measures are required? For banks, the priority is to stabilise the regulatory framework
and therefore we must finalise Basel III. Here, it is useful to remember that, essentially - let's say
approximately 80% - Basel III was already completed in 2011. In addition, there is now a broad
consensus on risk measurement approaches. The main point that is still undecided and which
continues to occupy the Committee members is the setting of the so-called "output floor" for
banks that apply internal models. Let's be clear: I read and hear the banking industry, and French
banks in particular, giving its advice for negotiations on this point. A little restraint would not go
amiss, and it is not our intention to defend corporate interests. If an output floor of 75% is not
acceptable, it is because this floor - and consequently the standardised approach - would
become the constraint for half of the international banks. I must stress that our goal is to
finalise Basel III, based on improved models that remain risk sensitive, and not to move
onto Basel IV, which would use the standardised approach. Therefore, an agreement must
be reached on a lower output floor along with a tightening of controls over the banks' internal
models, much like the targeted review of internal models (TRIM) that was approved for the Single
Supervisory Mechanism and the results of which we are more than willing to submit to
peerreview. This stance is shared at the very least by other European countries such as Germany
and the Netherlands, and by the European Commission.
International cooperation on financial reforms is a common good that has been extremely
precious during these past eight years and is crucial to our future. The temptation to go back on it
is extremely dangerous and would increase the risk of another financial crisis. In this respect, the
current situation in the United States is worrying. Generally speaking, the measures that will be
effectively adopted and implemented by the new administration and the competent government
agencies regarding financial and banking regulation still have to be clarified. There is a possibility
that the regulations already finalised in Basel such as the Fundamental Review of the Trading
Book (FRTB) or the Net Stable Funding Ratio (NSFR) could be called into question. Unilateral
deregulation would be nothing less than a lose-lose scenario with serious consequences for the
stability of the global financial system as well as the competitive landscape for US and European
banks. In view of this, the integration of a possible agreement on Basel III into European
standards should be finalised while keeping a close eye on what the other major countries will
do, starting, as you will have understood, with the United States.
We must also avoid regulatory arbitrage. For non-bank players, significant progress is required
on liquidity management by funds and asset management companies, on fintechs and more
generally on the major digital platforms, which, if they carry out financial activities, will have to
comply with similar regulations sooner or later. As for the financial markets, the decrease in
market liquidity must be explained, and in doing so we must also consider the role of high
frequency trading and its highly debatable social utility.
A final word on central counterparties (CCP): I would like to acknowledge the valuable
proposals recently made by the European Commission to insist that those CCPs whose
activities are "super-systemic" for the EU market establish themselves in the European Union.
They are a step in the right direction and represent the only viable mechanism to guarantee that
European authorities and national central banks in particular, can control and manage the risks
that CCPs are likely to pose to the financial stability of the European Union. Once the provisions
on the resolution of CCPs have been finalised, the compensation framework within the EU will
have been improved considerably.
Let me conclude with a general remark that concerns the economy: we need a system to
assess, ex post, the economic effects of the reforms. France fully supports the work of the FSB
to develop a structured analytical framework, which Germany has rightly included in its priorities
for its G20 presidency.
Europe, and Germany and France in particular, now has a special duty to protect financial
regulation - a regulation that is sensitive to risk, balanced in its treatment of banks and
nonbanks and binds the entire international community. Generally, that is what we've been doing well
since 2009, and it is what continues to inspire us. Thank you for your attention and I wish you an
excellent conference.