lucas papademos : banking supervision and financial stability in europe speech by mr lucas papademos, vice president of the european central bank, at a conference organised by the european banking federation, “ supervision of international banks : is a bank crisis still possible in europe? ”, brussels, 28 october 2005. * * * ladies and gentlemen, thank you for inviting me to this conference. i am very pleased to participate in this panel discussion. our subject today – the future of banking supervision in europe – is topical and important. it is and will remain a key area of financial services policy in the eu over the coming years. effective and efficient banking supervision is essential both to promote financial integration and to safeguard financial stability. from a financial integration perspective, the main priority is to remove any supervisory obstacles to cross - border finance, notably via enhanced supervisory cooperation and convergence. other panellists will certainly address these issues in some detail. in my speech, i will focus on potential challenges for eu banking supervision from a financial stability perspective and assess the existing institutional arrangements in this regard. i. challenges to banking supervision and financial stability let me start by pointing to some developments in the banking sector which may pose challenges to current financial stability arrangements. as we are all aware, the financial integration process – in the eu as well as on a global level – has involved a substantial increase in cross - border banking. four developments can be mentioned in this respect. first, banks have considerably expanded their crossborder banking activities in europe, especially in the wholesale and capital markets. for example, in 2005 cross - border interbank loans account for 30 % of total interbank loans and the share of crossborder bank holdings of non - bank securities in the total holdings of such securities by banks is more than 45 % ; in 1997, however, both figures stood at around 20 %. second, a number of large and complex institutions spanning several jurisdictions have emerged. some of them are akin to paneuropean players. the 14 largest of these cross - border banking groups already account for almost one - third of total banking assets in the eu. third, large foreign establishments with a significant market share in host countries have become more prevalent, especially, but not exclusively, in the new member states. finally, cross - border banking groups are increasingly centralising key business functions such as credit risk and liquidity management, often cutting across separate legal entities in different countries. the growing prominence of cross - border banking has important financial stability implications.

for those large gains was expected in the first quarter of this year. also, the expiration of extended unemployment compensation benefits and bonus depreciation at the end of the year was likely to take some of the starch out of consumer spending and business fixed investment. beyond these anticipated factors, we had unusually harsh winter weather, which likely depressed housing activity, manufacturing production and some aspects of household spending such as motor vehicle purchases. with the fundamentals of the economy improving and fiscal drag abating, i expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015. but, there remains considerable uncertainty about that forecast and, given the persistent over - optimism about the growth outlook by federal reserve officials and others in recent years, we shouldn ’ t count our chickens before they hatch. business fixed investment and housing are two key areas where activity has been disappointing. they need to kick in more forcefully for the economy to grow at an above trend rate for a sustained period. with respect to capital spending, the recent trajectory has been very soft relative to the apparent strong underlying fundamentals. corporate cash flows have been strong, profit margins are high, balance sheets are healthy and financing generally appears readily available at low interest rates. moreover, the absolute level of capital outlays is low so that the capital stock is expanding only slowly. despite these positive fundamentals, real business spending on equipment and software has risen only 3. 2 percent over the past four quarters and contracted in the first quarter. this is a bit of a puzzle to me. but, i expect it to be resolved by a pickup in capital spending. recent trends in durable goods orders and conversations i have had with businesses in my district suggest that such a pickup may finally be occurring. on the housing side, residential investment has stalled out over the past few quarters. although i expected some slowing due to the rise in mortgage rates in the middle of 2013, the extent of the slowdown has surprised me given that the recent pace of housing starts – roughly 1 million per year – is far below what is consistent with the economy ’ s underlying demographic trends. i think housing has been weaker than anticipated because several significant headwinds persist for this sector. first, mortgage credit is still not readily available to households with lower credit scores. second, some people are coping with higher student loan debt burdens that have delayed their entry into the housing market as first - time homebuyers