fernando restoy : forging a new financial system – reforms outstanding and ongoing opening address by mr fernando restoy, deputy governor of the bank of spain, at a conference at complutense university of madrid, madrid, 27 october 2014. * * * let me first thank the organisers, in particular professor carmen alonso ledesma, a fellow sufferer on the banco de espana governing council, for their kind invitation to participate in this conference. looking at the programme, the topics to be discussed in the various papers and roundtables, and the expertise of the speakers, i harbour no doubts that this conference will prove enormously useful in enriching the knowledge of all those present about the reforms undertaken and the challenges still pending for the financial system. a good number of these reforms and challenges are linked to the flaws identified in the functioning of the sector as a result of the international financial crisis that broke in 2007. in particular, the crisis has highlighted considerable structural shortcomings – which led to an incorrect evaluation and management of key risks by financial institutions – and major limitations to the prevailing crisis - prevention and management systems. in the euro area, as you know, the perverse link between the vulnerability of the credit sector and the weakness of public finances precipitated an institutional crisis which jeopardised the very continuity of the monetary union. the consequences of the financial crisis have been very adverse. it plunged many economies into recession, considerably weakened public finances in many countries and, generally, entailed considerable losses in well - being. fortunately, and this is a positive message worth emphasising, the authorities ’ response was generally correct. in a relatively short time, sweeping regulatory changes – which you will be able to review in detail in this conference – were ushered in. moreover, the euro area has managed, at unprecedented speed, to launch an institutional reform, namely the banking union, whose scope cannot be overstated and which entails the strengthening of the monetary union. in spain, i believe the work done in reforming our financial system has had very satisfactory results. international agencies, in particular the imf and the european commission, have repeatedly testified to these results. so too have the markets, where there have been significant increases in the valuation of instruments issued by spanish banks. and, most recently, there was further acknowledgement in the comprehensive assessment of the european banking sector by the ecb and the european banking authority. given the importance of this exercise, as a prior step

, through the recapitalisation and consolidation processes undertaken, the clean - up of balance sheets and the reform of the savings banks. upcoming challenges nevertheless, however positive this return to normal – which has now been evidenced by the tests conducted in the run - up to the ssm – has been, especially following the turmoil experienced, there is no respite, as there are major challenges ahead for spain ’ s banks, as there are for the banks of our european partners. in particular, banks will have to learn to live with the considerable increase in regulatory demands. these will arise especially from the imminent entry into force of the liquidity and provisioning requirements included in the basel iii accord, and from the foreseeable introduction of additional measures, such as those that will demand separation in some cases between the investment banking business ( proprietary trading, market - making, etc. ) and the traditional banking business, or that will require banks to have liabilities available that may be converted into equity in the event of resolution. at the same time, greater restrictions can be expected on the admittance of internal asset risk assessment models when they represent savings in regulatory capital. in turn, within the framework of the ssm, work can be expected to begin to try to harmonise the regulatory differences that persist ( for example, in the calendars for application of the capital deductions established in basel iii ) as well as supervisory practices ( for example, relating to the approval of internal risk assessment models ). insofar as greater harmonisation can be expected to be conducive to stricter supervisory practices, in each area the new supervisory framework will generally tend to raise the bar for all european banks. hence, in order to adapt to the new regulatory and supervisory environment, many banks will need to make further efforts to strengthen their own funds. moreover, this will have to be done against a complicated macroeconomic backdrop in europe, where economic conditions bis central bankers ’ speeches are still prone to vulnerability and interest rates remain very low, acting as a brake on improvements in the quality of loanable assets, growth in lending and recovery in interest margins. that said, at the banco de espana we are convinced that spain ’ s banks will successfully adapt to all these challenges, adjusting where necessary their business strategies, improving where possible their efficiency levels and harnessing any opportunities the market may offer to continue to bolster their balance sheets in keeping with the new demands. thank you for your attention. bis central bankers ’