Keynote speech
Bloomberg Capital Markets Forum Madrid
Pablo Hernández de Cos
Governor

Introduction
Let me begin by thanking Bloomberg for their kind invitation to participate in the opening
session of the Bloomberg Capital Markets Forum Madrid.
In my address I shall refer firstly to the phenomenon of banking disintermediation in Spain
in the European context, discussing the main implications. And secondly, I shall focus on
the importance of the Capital Markets Union project as a private risk mitigation and sharing
mechanism in the Economic and Monetary Union (EMU) which, in conjunction with the
Banking Union, will provide for an increase in financial stability in the euro area.
Banking disintermediation in Europe and in Spain
As is well known, in the continental European countries banks have traditionally played a
key role in the intermediation of economies' financial flows. However, recent years have
seen an increase in European firms' preference for tapping capital markets.
Fixed-income financing has thus risen from accounting for 8% of European firms' total
financial debt at end-2007 to 12% in the third quarter of 2018.
Spain has been no stranger to these global trends of banking disintermediation. Indeed, the
proportion of fixed-income securities relative to the business sector's financial debt has
risen over the same period by 10 percentage points (pp). This has been mirrored by a fall,
since 2010, of 9 pp in banks' weight in the total financial assets of the financial sector.
This gradual increase in business financing on the capital markets by means of the issuance
of fixed-income securities is due to a series of factors, some transitory and others more
structural in nature.
Notable among the transitory factors common to all Euro area countries was the
introduction in 2016 of the Eurosystem's Corporate Sector Purchase Programme, which is
part of the Asset Purchase Programme. This programme has contributed to boosting
corporate funding through fixed-income issues, by reducing their cost relative to bank
financing. In any event, analyses by Banco de España economists show that this
programme also contributed indirectly to improving the access by SMEs to bank funding.
This was because banks allocated a high proportion of resources freed up by the repayment
of loans by securities-issuing firms to funding smaller-sized firms without access to the
securities markets.
Following the end of net asset purchases, since early 2019 the Eurosystem's Asset
Purchase Programme has remained active by reinvesting the amounts maturing on the
securities purchased. It is thus expected that this programme will continue to be conducive
to the issuance of corporate debt.
Among the more permanent factors behind the rise in capital markets in Europe are, firstly,
the new international banking regulations in response to the crisis. True, the new regulatory
requirements to improve banks' resilience to adverse shocks contribute to strengthening
financial stability. But they might also hamper banks' ability to compete in the intermediation
of some financial flows.
Secondly, the influence of the alternative fixed-income and equity markets is worth
highlighting. The launch of these markets, geared to luring medium-sized firms, is also
contributing to the development of the capital markets. In particular, in Spain we have
witnessed the development of the alternative fixed-income market MARF. That said, their
size is still small in most European countries.
In the future, this trend towards the greater development of capital markets might continue
if progress is made on the European project to create a Capital Markets Union, as I shall
later discuss.
A further factor pointing in this same direction is the potential increase in long-term saving
associated with population ageing. The reason is that, for this investment horizon, capital
markets may be a comparatively more attractive option than in the case of short-term
saving.
Moreover, technological progress might prompt an increase in the activity of new non-bank
competitors with innovative technologies. So far, market penetration by this type of player
in the credit-supply business is limited in most European countries. Initiatives like the
regulatory sandbox currently being designed in Spain, have the objective of promoting the
emergence of these type of players.
These controlled test environments aim to provide, with all due security measures for
participants and the system as a whole, a nimble framework that provides for the viability
testing of the new business models based on new technologies.
They will also enable the supervisory community to gain knowledge on how new business
models and technologies function and the new risks associated with them. In turn, this in
depth knowledge will allow supervisors to fully exploit the proportionality principle
embedded in regulations for those viable projects that might finally exit the test environment.
Because we should not forget that such test environment should have a temporary nature.
Hence, for those projects that prove viable, the principle of same regulation for similar
activities and risks should prevail. In any event, it is currently difficult to foretell how the
development of these disruptive technological players will evolve in the future.
Like any process of change, financial disintermediation will involve significant benefits for
society; but it is not free from challenges for banks, for the regulator and, naturally, for the
Banco de España itself, in its role as guarantor of financial stability.
Among the benefits for those demanding funds, associated with a more diversified financing
structure, are, on one hand, their greater stability in the face of shocks that affect specific
institutions in the financial sector.
Indeed, the international financial crisis highlighted the greater difficulties in gaining access
to funding for those firms depending exclusively on bank lending, in contrast to those with
a more diversified financial structure. These problems were more acute for those firms -
chiefly SMEs - operating with a small number of banks more harshly affected by the crisis,
since the possibilities of replacing their usual lenders with new banks was not always easy
owing to asymmetrical information problems.
On the other hand, the development of non-bank funding sources may also contribute to
providing readier financing for specific investment projects; for instance, those undertaken
by innovative or newly created firms, for which the availability of bank lending may be more
limited. It should be borne in mind that the launch of some of these projects may have a
positive impact on firms' productivity growth.
Naturally, these advantages for those demanding funds may have positive effects for society
as a whole, insofar as they result in higher and more stable economic growth.
From the standpoint of fund suppliers, the existence of alternative means of investing their
saving may result in more attractive return/risk combinations for various savers, depending
on their needs and preferences.
So that households and firms may benefit fully from all the advantages of banking
disintermediation, they will need to have sufficient financial knowledge. This is something
that the Banco de España, along with other bodies such as the CNMV, is firmly committed
to through financial education programmes such as "Finance for all".
Evidently, disintermediation poses substantial challenges for banks. Greater competition
from non-bank intermediaries may affect both banks' business volumes and net interest
income. This potential loss of income is significant at the current juncture, at which banks
are posting modest levels of profitability, the economy is slowing and private-sector demand
for funding remains sluggish.
In response to this more competitive and challenging environment, banks could adopt
various strategies such as greater income diversification, the containment of operating costs
and increased investment in technology.
From the regulatory standpoint, the main challenge will involve maintaining a level playing
field for all financial system participants, so that similar activities posing similar are subject
to a comparable level of regulation.
As the supervisor of banks and guarantor of financial stability, the Banco de España also
faces very important and specific challenges as a result of disintermediation.
In this new environment, the relative importance of the main risks to financial stability will
foreseeably change with an increase of those linked to market risk. As a result, the
supervision and analysis of the financial risks arising outside the banking system and of the
interconnections between banks and other financial system participants will become more
important. These interrelations will not only take the form of cross-balance sheet or income
statement positions; similarities between the portfolios of different types of participants may
also mean that shocks initially affecting one institution or a group of institutions may
ultimately have repercussions for all other financial market participants.
In this respect, it should be borne in mind that the Banco de España is responsible for
activating and deactivating certain macroprudential tools introduced under legislation to
mitigate systemic risk in the financial sector. Most of these instruments are applied almost
exclusively to banks. Thus, growing banking disintermediation might diminish the general
effectiveness of such instruments, if other participants in the financial system, to which
these tools were not applicable, were to engage in activities similar to those of banks.
To mitigate this risk, the forthcoming creation of a Spanish Macroprudential Authority will
provide the appropriate forum in which all financial system supervisors may share their
analysis of risks and coordinate the most suitable response, without leaving "gaps" that
might restrict effectiveness
Private risk mitigation measures in the Economic and Monetary Union
In any event we should be mindful that, to ensure greater stability in European financial
systems, it does not suffice to adopt measures at the national level; it is also necessary to
push through a greater level of development and integration of European capital markets so
that, in conjunction with the Banking Union, the risk-sharing and mitigation mechanisms at
the level of the euro area as a whole are strengthened.
In this connection, allow me to dwell on the importance of private risk mitigation measures.
The crisis highlighted the scant power of these channels in the Economic and Monetary
Union, compared with other monetary unions. It also became evident that these channels
diminish, or even disappear, precisely when they are most needed.
It is estimated that in the United States the cross-border ownership of capital across states
enables 40% of the asymmetric shocks affecting a State to be diluted among the rest
through private capital markets. However, in the euro area such dilution is only 10%, owing
to a greater national bias in asset holdings.
The main private channel for risk dilution in the euro area at present is that of lending by the
European banks that operate in different Member States. But this channel becomes
unstable and may even shrink or disappear in situations of uncertainty owing to the link
between sovereign States and their domestic banks.
As is known, capital markets in Europe are less developed and less integrated than in the
United States. Corporate financing on equity markets is very limited and, moreover, shows
a strong national bias.
In the United States, cross-border holdings of assets play a significant role in mitigating the
shocks that affect a State. However, in Europe this mechanism is very limited.
This is why it is crucial to complete the Capital Markets Union project so as to achieve
greater depth and integration of European Union capital markets. That will allow for greater
risk-sharing in private euro area channels and less reliance on bank financing, which will
result in greater stability in the euro area.
The aim of this project is to provide new financing sources for firms at a lower cost, and at
the same time to attract more foreign investment towards the European Union. To achieve
this, the European Commission proposed a plan of action in 2015 with over 30 measures to
construct an integrated capital market in the European Union, to be completed by 2019.
However, so far, the implementation of these measures has been slow and incomplete.
It is a far-reaching project requiring highly diverse measures, including most notably the
creation of market infrastructure, the harmonisation of market regulation and supervision,
and the strengthening of the European supervisory authorities.
There is also a need to move towards harmonising insolvency arrangements, both for banks
and non-financial corporations, and to tackle aspects such as the bias in some countries'
tax systems towards debt as opposed to equity financing.
Moreover, this project takes on particular importance in the context of the exit from the
European Union of the United Kingdom, which currently plays a key role as a European
financial centre.
In connection with the Capital Markets Union, some initiatives have been adopted to provide
financing for those segments with scant access to bank lending. One example is the
innovation projects for which the promotion of venture capital funds is being considered.
Measures have also been adopted to promote the use of simple, transparent and
standardised securitisations in order to provide bank lending to small firms. These examples
evidence the complementarities between bank markets and capital markets, and also how
the Banking Union and the Capital Markets Union reinforce one another.
Turning to equity markets, progress has been made to provide firms with access to these
markets. Further, many studies have been undertaken to identify the obstacles to
international investment.
Yet, in order to equip the euro area with greater stability, resolute headway must also be
made in European bank integration. Pan-European banks are an essential requirement if we
are to have a single market for wholesale and retail financial services. That will provide both
for gains in efficiency and cost reductions in banking services. And, moreover, it would
contribute to improving the euro area's stability in the face of shocks.
In this respect, the culmination of the Banking Union with its three pillars and the subsequent
creation of pan-European banks would also enable the link between sovereign risk and bank
risk to be substantially mitigated.
There has been significant progress on the first two pillars, the Single Supervisory
Mechanism and the Single Resolution Mechanism. But the third pillar - the creation of a
European Deposit Guarantee Scheme - remains pending.
In conclusion, in Europe, and in Spain in particular, we have witnessed a phenomenon of
greater disintermediation in recent years. Associated with it is a more significant role for
capital markets when it comes to providing financing for the economy and channelling
citizens' savings. In parallel, technological change conducive to disintermediation is under
way, and is prompting the creation of new services and risks that must be addressed by the
supervisory community.
To harness these market trends so as to promote the soundness and stability of Economic
and Monetary Union, resolute progress must be made towards the greater European
integration of banking markets, fomenting at the same time the development and integration
of capital markets throughout the Union.
Thank you.