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Emilio Botin's speech at the 4th International Banking Conference

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Emilio Botin's speech at the 4th International Banking Conference

  1. 1. “A global financial system for a global economy” 4th International Banking Conference, 18 October 2011 Emilio Botín, Chairman, Banco SantanderINTRODUCTIONLadies and gentlemen,I would like to thank you all - authorities, financial sector representatives,analysts, and academics – for attending this 4th International BankingConference.The first edition of this Conference took place three years ago and just onemonth after the failure of Lehman Brothers. Since then, there have been severalimportant advances both in terms of identifying the underlying problems that ledto the crisis and also in proposing potential solutions. However, despite this, wecannot lose sight of the fact that global confidence continues to remain low, andmarket uncertainty remains high.To talk us to about these issues, we are honoured to have with us today severalleading players in the debate on international regulation, including:  Andrea Enria, Chairman of the European Banking Authority  Joaquín Almunia, Vice President of the European Commission and Commissioner responsible for Competition,  Elena Salgado, Vice-President and Minister for the Economy of Spain,  José Viñals, IMF Financial Counselor and Director of the Monetary and Capital Markets Department,  Norman Chan, Executive Director of the Hong Kong Monetary Authority, as well as  important representatives from regulatory and supervisory bodies and national and international institutions.I would like to express my thanks to all of them for being with us today.This crisis reminds us of a number of things: cycles are not a thing of the past liquidity is not always abundant and cheap, and at times it can even disappear financial products help to spread and diversify risk, but they do not eliminate it completelyEmilio Botín. 4th International Banking Conference 1Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  2. 2.  we live in an interconnected economy that requires the co-ordination of economic and financial policies, as well as intense and on-going supervision of global imbalances. The Eurozone requires greater political and monetary integration in order to ensure the stability of the euro.At the G20 summit in the autumn of 2008, world leaders were aware of all ofthese issues, when they undertook to tackle the problems that brought us to thiscrisis.The measures agreed included significant reforms to banking sector regulation,as well as the strengthening of financial supervision and governance, and theco-ordination of economic policies at the international level. All of those stepsare key components in ensuring the recovery and stability of the financialsystem, as well as the economy as a whole.Today, I would like to talk to you about three things: 1. Firstly, about the steps that have been taken to reform financial regulation. Important advances have been made, in particular in the field of capital and liquidity standards and in the development of frameworks for the management and resolution of banking crises. Levels of capital and liquidity in the global financial system are currently far higher than they were at the start of the crisis; 2. Secondly, about the importance of concentrating efforts on the implementation of agreed measures. Now is the time to apply the brakes to additional regulation and to assess the impact of the measures that have already been implemented; and 3. Finally, concerning what we feel remains to be done in relation to world economic governance. In particular, I will refer to the European sovereign debt crisis as well as the recent proposal to recapitalise the banking sector.1. Financial regulation reformSince the start of the crisis, international regulators and financial entities alikehave worked intensively to take decisive steps towards building a more stablefinancial system.At the next meeting of G-20 leaders, agreement is expected with regard to:identifying and dealing with systemic entities, and frameworks for the effectiveresolution of banking crises.Emilio Botín. 4th International Banking Conference 2Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  3. 3. Systemic institutionsMuch progress has been made in relation to the the Basel Committee’sproposal to identify and deal with systemic entities. Significantly, the proposalnow recognises that size is not the only variable that determines systemic riskand that in fact, complexity and interconnection between entities are alsoimportant elements of systemic risk.Crisis prevention and resolutionThe second area where we are anticipating agreement at the next G20summary is on frameworks for prevention and orderly failure during bankingcrises. It is fundamental that any institution should be able to fail, in such away that it can leave the market without generating systemic risk and withoutthe need for recourse to public funds.Putting together feasibility and contingency plans, the so-called living wills, is avery valuable exercise - both for entities and for supervisors. Such plans willenable an assessment to be made about the capacity for resistance andresponsiveness of these entities in the event of a crisis. They will also provideguidance to the crucial decisions being made by entities and supervisors atvarious moments during the crisis.Banco Santander was the first bank to deliver a living will to its Central Bank - inApril last year. We were able to do so thanks to the simplicity and transparencyof our business model, and to the structure of our subsidiaries that areautonomous in terms of capital and liquidity.The crisis has shown that subsidiary models – such as those used by BancoSantander – allow for: - an effective assignment of incentives to local administrative teams on a day-to-day basis, which have to independently obtain financing and capital for their activities, as well as put in place systems of solid corporate governance, and - very clear firebreaks in the event of crisis, limiting the contagion of financial problems between the various entities within international groups; - greater capital flexibility at the group level by requiring subsidiaries to have independent capital quoted on the stock exchange.Basel IIIIn addition to these two aspects of regulation which are already well in hand forthe next G-20 summit in Cannes, I would now like to briefly refer to Basel III, areform that was agreed three years ago and covers the international standardsof capital and liquidity.Emilio Botín. 4th International Banking Conference 3Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  4. 4. From the outset, Banco Santander has supported the broad elements of thisreform, in particular:  the standardisation of capital requirements at the international level, and  the intention for entities to have stable sources of financing to support their activities.However, there still remain two questions that we believe are extremelyimportant to address:- firstly, the wide international disparity in computing risk weighted assetsBasel III implies a qualitative leap in terms of ensuring the homogeneity ofinstruments for computing capital. However, that same impulse is not beinggiven to improving transparency in the computation of risk-weighted assets.This is a vital step in making it possible to differentiate between the levels of riskand solvency of various entities.There are still great differences between the computation of risk-weightedassets between countries, which cause harm to entities with large capitalholdings and low-risk business models, such as Banco Santander, amongstothers- the second relevant issue that remains unresolved is the definition of liquidity ratios.As they are defined at the moment, they:  damage retail banking;  introduce significant risks of a contraction of credit portfolios, and  in some cases, constrain the banking sector’s maturity transformation role.2. ChallengesAs regards the implementation of the entire regulatory reform agenda,there are three risks that call for special attention: 1. the risk of fragmentation of the financial system 2. the risk of strangling economic growth, and 3. the risk of failing to sufficiently strengthen supervision.Emilio Botín. 4th International Banking Conference 4Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  5. 5. The risk of fragmentation refers to the requirements – over and above whatwas agreed internationally - that some countries are starting to imposeunilaterally on entities within their jurisdiction.In our opinion, priority must be given to implementing the new global rules in aco-ordinated and homogeneous manner, before adding new layers of localregulation.A clear example of a positive effort that has been made to reach a greater levelof regulatory and supervisory co-ordination between countries is theimplementation of the new European Banking Authority. We are very lucky tohave Andrea Enria, Chairman of the EBA, with us today. I´m sure he will sharehis views with us on these issues.The European Banking Authority’s work is key to delivering objectives likethe drafting of a single rule book to guarantee the harmonised implementationof standards across Europe.The risk of fragmenting the system through significant regulatory variations atthe national level may particularly disadvantage the European financial sectorwhen compared to other areas or countries, such as the US. In this respect, agood example is the proposal to set up a levy on financial transactions only inEurope.I know that the Independent Commission on Banking (ICB) in the UnitedKingdom has discussed at length the impact that its proposals may have on theBritish financial system and its relationship with the international system.In that sense, I will be greatly interested to hear what our British representativesmay have to say today, in particular: Tom Scholar from the British Treasury; BillWinters from the Independent Banking Commission, and Andrew Haldane fromthe Bank of England. I should like to thank them for taking the time out of theirbusy schedules to be with us today.The second risk that we face is endangering the capacity for a recovery inthe world economy.I said last year that there is no healthy economy without healthy banks.Bank play a fundamental role in: financial intermediation, channelling capitalfrom savers to the most profitable investment projects, and managing andprotecting the system of payments.To that end, it is essential that the new standards should not harm retail banks.Emilio Botín. 4th International Banking Conference 5Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  6. 6. By taking deposits and granting loans, retail banking is a key engine ofeconomic growth.Finally, we run the risk of not giving concrete form to the measures that areneeded to provide supervision that is:  intensive  pro-active  anticipatory, and  that covers possible differences in regulation.I have said many times that no amount of regulation can compensate forpoor supervision.Although it seems that we are all in agreement as to the importance of propersupervision, I feel that we ought to go even further in:  giving concrete form to principles  defining requirements, and  taking the measures that a needed to ensure effective supervision.We have with us today the person who led the proposal on reforming theEuropean supervisory framework, Jacques de Larosière. I am in completeagreement when he says that: The quality of supervision and the risk of expansion of shadow banking are decisive aspects to complete regulatory reforms in a satisfactory manner.3. Brake on regulationLadies and gentlemen,The international financial sector needs time to adjust to the important changesthat are in hand.We cannot continue to have new burdens placed on the sector, such asnew local taxes or requirements of various types.As I shall say later, neither is it a good time, after spending the last threeyears in designing a new regulatory framework that has yet to beimplemented, to launch new proposals on capital ratios in Europe thatwould give rise to instability and uncertainty.Now is the time to take a break in the regulatory processes, in order to:  IMPLEMENT the reforms that are under way  MEASURE the cumulative impact of those reforms on the economy, andEmilio Botín. 4th International Banking Conference 6Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  7. 7.  REINFORCE supervision.In any case, it is important to remember that to resolve all the problems thatcurrently affect the financial sector and the world economy, it is not enough toembark upon reforms and take measures only in the banking sector.This brings me to the following thought for today: there are significant reformspending in other areas separate from financial regulation – in particular, Irefer to the European sovereign debt crisis.4. Reforms beyond the banking sectorIn response to the crisis three years ago, the international community – led bythe G20 – set to work on coordinated solutions and on creating an institutionaland political framework that would guarantee stable growth in the future. Thatmeant coordination of macro-economic policies as well as banking regulation.As we have seen, regulatory changes have been many in number, but thesame is not true of advances in the design of a framework of stable, co-ordinated macro-economic policies.A few advances have been made: Strengthening the governance of theinternational economy by setting up new bodies and boosting some of theexisting ones, and increasing the weight of emerging markets in line with theirgrowing share of world GDP.Some good examples are:  institutionalising the G-20 as a forum for taking global economic decisions  setting up the Financial Stability Board (FSB) to develop policies and measures to foster international financial stability, and  strengthening the International Monetary Fund and the Basel Committee as basic organs for the world economic and regulatory system.However, if we wish to restore confidence in the markets, we must ensurethat the new international financial architecture can anticipate risks and takecorrective measures.To that end, it is necessary:  firstly, to reinforce the quality and homogeneity of financial supervision, not just at a microprudential level but laos the macroprudential, so that it covers the system as a whole and from an overall perspective, andEmilio Botín. 4th International Banking Conference 7Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  8. 8.  secondly, it is essential to ensure effective international coordination for macro-economic policies including: o the possibility of reaching binding long-term agreements that aim to guarantee greater economic stability, and o mechanisms to monitor compliance with those agreements, and to penalise non-compliance.In that sense, the Eurozone in particular has its own challenges, to whichthe only way forward, in our opinion, is: more political and economic integration.European leaders have been very clear: there is no going back on the euro.I am confident that Europe will find the route to a stable, strong, and prosperousEurozone.We view very positively some steps that have been taken recently, for example:  constitutional changes to introduce structural ceilings on deficits and public debt, and  the approval given in all countries to the plan to strengthen the European Financial Stability Fund, which will play a fundamental role in resolving not only problems of solvency but also liquidity amongst Member States. Today, however, the priority must be to resolve the sovereign debt crisis.5. ConclusionsI shall give you my opinion from the perspective of a Group that has a verylimited position in European public debt and a strong capital base.We need to attack the root of the problem: The sustainability of the euroand of the eurozone.Now is the time to turn to action and adopt decisive measures to strengthenthe institutional design of the euro, as well as to ensure a greater degree of co-ordination between economic policies in the eurozone.Only when that matter has been resolved:  will confidence be restored  will credit begin to flow again, and  will it be possible to ensure the recovery of European economies.Over the last few days, various proposals have been put forward to recapitaliseEuropean banks.Emilio Botín. 4th International Banking Conference 8Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011
  9. 9. Casting doubt in a general manner on the sustainability of public debt or of theEuropean financial system may bring us to a ceaseless downward spiral ofsovereign debt and banking crises.It is possible that some institutions that are particularly affected by the Greekpublic-debt crisis, or by the market-debt crisis in general, may require morecapital. However, there should not be obligatory, indiscriminaterecapitalisation of European banks sector without resolving the problemof public debt once and for all.In summary, I feel that these proposals make no sense for the followingreasons:  they undermine what has been decided under Basel III in recent years,  they invalidate the stress test carried out by the European Banking Authority just three months ago, and that took stock of the capital requirements of certain European banks  they create insecurity and confusion  they increase market uncertainty, and, finally  they will produce a contraction of credit, since many institutions will opt to reduce their balances.In sum, any capitalisation of European banks will not restore confidence andeconomic growth if it is not PRECEDED BY a final resolution of the sovereigndebt problem.Thank you.Emilio Botín. 4th International Banking Conference 9Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011