luis m linde : key issues on today ’ s banking industry closing speech by mr luis m linde, governor of the bank of spain, at the 6th santander international banking conference, madrid, 5 november 2013. * * * i would like first to give my thanks to banco de santander for inviting me to take part in this final session of your 6th international banking conference, an excellent opportunity to review and assess key issues on today ’ s banking industry, which has to face, in the next few years, important regulatory and operational changes. i will comment on several elements of the new basel iii capital framework that remain contentious or are still open to discussion. among those, the leverage ratio, the liquidity ratio and the very important issue of consistency in implementation. then, i will move on to the financial stability board ’ s work on resolution strategies and, finally, i will comment on the european union bank recovery and resolution directive ( brrd ), and one of the most important elements it contains, the bail - in tool. first, the leverage ratio, the ratio between tier 1 capital and total balance - sheet and offbalance - sheet exposures not deducted from the calculation of tier 1. this ratio is set, in principle, at a minimum of 3 %. its entry into force as an obligatory pillar 1 ratio is foreseen to be in 2018. this new tool has been designed as a simple, transparent measure, not linked to risk, complementing and acting as a floor with respect to the risk - based minimum capital ratio. it seeks to reduce excess leverage in the banking system, and to afford an additional measure of protection against the so - called “ model risk ”, i. e. against the risks associated with the use of sophisticated models allowed under basel iii. there are still doubts about this ratio as a pillar 1 measure. i understand that the doubts do not concern the concept, but, rather, its final calibration and how it will impact on specific business models, in particular, those most focused on retail activity. moreover, it is not fully clear whether the best option will be a single percentage for all banks, irrespective of their size or business model ; or whether it would be better to opt for different percentages, depending on the type of business or activity of the bank ; or to establish a range within which the supervisor would have discretion to decide which figure applies best to specific institutions. we believe that this new ratio can be a

, the resolution plans and with the involvement of the resolution authorities of the main jurisdictions in which the groups operate. • second, a balanced loss absorbing capacity allocation across the group, according to local business risk profile in each jurisdiction. both elements will mitigate the risk of financial fragmentation due to non - coordinated measures taken by the different authorities, namely, “ ring fencing ” initiatives. spanish g - sibs fully comply with the pre - conditions to be considered “ multiple point ” groups : they are organised through local retail banking subsidiaries ; critical economic functions, e. g. payment systems, are organized at the local level ; subsidiaries are selfsufficient in capital and funding ; and they rely on separate firms detached from the bank for operational support, for instance, on information systems. so, although there are still many issues to be clarified, we think that the most realistic resolution approach for the spanish international banking groups is the “ multiple point ” strategy, provided that, in the event of resolution, their organisational and financial structures are suitable for healthy parts to be sold or maintained as a surviving group, split from their distressed sister companies, using other resolution tools such as asset transfers or bridge banks. now, i will go to the second main element of the new framework, the bail - in instrument. bis central bankers ’ speeches next year, most of the fsb work on resolution will focus on preparing proposals on the adequacy of g - sifi loss absorbing capacity in resolution, namely, what we call “ gone concern loss absorbing capacity ” or glac. this concept is similar to the minimum requirement of eligible liabilities ( mrel ) set up in the eu bank recovery and resolution directive. this g - sifis loss absorbing capacity is a complex matter, involving the need to clarify or determine a long list of questions, for instance : its characteristics, minimum amount, intragroup distribution and triggers for it, enforceability of bail - in ; regulatory limits on loss absorbing holdings, and disclosure. let me underline that a shared view on the characteristics and levels of this “ loss absorbing capacity ” is critical for a “ level playing field ” among g - sifis. also, we must avoid any approach that might be considered as an additional layer of differentiated capital requirements, a sort of differentiated “ tier 3 ” requirement. as i mentioned before, determination of the appropriate levels of glac must be dependent on the complexities and risk of the activities developed by each institution.