14, 2012 6:49 pm
Europe needs to embrace banking union
The financial crisis hit Europe harder than any other economic area. When it struck, it caught the eurozone without a sufficiently developed institutional framework, resulting in a slow and uncertain response. Instead of meeting the challenge, the EU’s early responses undermined investor confidence and triggered a wave of disaffection among citizens.
Europe has been the cornerstone of western society but if we do not act with speed and determination, we run the risk of being swept into decline and irrelevance.
There is no turning back from the euro or from further European integration. There is no plan B. More integration requires a banking union that includes common supervision, unified rules and a common deposit guarantee fund and resolution model.
A banking union is essential to break the vicious circle between sovereign debt and bank debt, to align regulations and supervisory practices across EU member states; and to strengthen European banking.
At present, there is no single banking market. Santander has met innumerable barriers in its attempts to expand in Europe. Most Latin American countries have been more open to our investment than many eurozone member states.
Banking union is an ambitious, complex and difficult process, both operationally and politically, but we cannot afford to postpone it.
First, it means that we must enhance and align standards of banking supervision. No amount of regulation can substitute for airtight supervision. The crisis has revealed that not all banks were subject to the same degree of supervision, which is one of the reasons for their mixed performance in recent years. The European Central Bank is positioned to assume the supervisory role in the eurozone. This should be done gradually, with the ECB initially overseeing the largest institutions.
Second, banking union means we must enhance transparency. If we want a single market, there must also be a single criterion for applying the rules, and we must all be measured by the same standards.
Third, a single deposit guarantee mechanism and a single resolution model are essential to restore confidence and protect customers.
Alongside this work towards a banking union, a proliferation of financial sector regulatory reforms will soon take effect. Some of them should be re-examined.
Basel III requirements are designed to strengthen the international financial system so it can better withstand crises. But they are also affecting lending volumes and interest rates, and are thus acting as a brake on the economy. Their impact should be monitored and minimised by calibrating and, when needed, overhauling certain measures. The rules on liquidity are a case in point.
For capital ratios to be truly uniform, as Basel III intends, several issues must still be addressed, especially agreement on a standard way to calculate risk-weighted assets.
Moreover, when ranking systemically important financial institutions, the structure of the bank in question should be considered. Firewalls that can prevent risk from spreading within an international institution – for example, those provided by Banco Santander’s model of subsidiaries, which are autonomous in capital and liquidity – should be recognised.
I agree wholeheartedly with the position taken in last month’s Liikanen review of European banking structures, that banks should only engage in banking. They should fulfil their basic functions: to channel savings into lending, to manage risk; and to focus on the customer. Those three things add up to what I would call a “good banking culture”.
In going back to basics, I see three crucial factors. First, solid corporate governance, including a board that is able to challenge management and has long term vision. Second, strong and independent risk management policies and procedures that allow a bank to anticipate events and define and control its risk profile at all times. Third, restoring the principle that banking should support the real economy by providing loans and financial services. This might sound boring but it still requires a great deal of experience, judgment and hard work to get it right.
Among these elements, none is more important than risk management, which forms the foundation of our business. Without strong foundations, it does not matter how big the building is: it will crumble. Without good risk management, it does not matter how big a bank is: it will fail.
Banking union will be crucial if Europeans are to regain confidence in the financial system and if financial institutions are to serve individuals, businesses and communities. This is how Europe and the banking sector can cease to be part of the problem and start being part of the solution.
The writer is chairman of Banco Santander
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Copyright The Financial Times Limited 2012.
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