How the EU reshapes the Belgian financial sector Filip Dierckx, chairman of Febelfin & Michel Vermaerke, CEO of Febelfin
How the EU reshapes
the Belgian financial sectorFilip Dierckx, chairman of Febelfin &
Michel Vermaerke, CEO of Febelfin
AGENDA
Febelfin | 26/6/2012 2
Introduction• The Unholy Trinity: changes on all ends
• EU today at a crossroads
Main subjects of today• Banking Union
• Eurobonds
• Fiscal Union
• Liikanen, Volcker & Vickers
• Basel III – CRD IV
• Shadow Banking
• Consumer protection
Conclusion
Introduction
3
• The Unholy Trinity: changes on all ends
• EU today at a crossroads
Febelfin | 26/6/2012
European
Government Crisis
Financial
crisis
Economic
crisis
The Unholy Trinity: changes on all ends
GrowthBank
stability
Debt
reduction
Febelfin | 26/6/2012 4
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)
01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Belgium
Italy
Spain
Portugal
France
Ireland
Greece
Eurozone crisis – historical perspective
• Maastricht Treaty + Stability & Growth Pact
• Sovereign debt max 60% of GDP
• Max 3% budgetary deficit
• No actual enforcement measures in place
• Created a factual Eurobonds environment
• Provided access to (too) cheap money for member states
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)Febelfin | 26/6/2012 5
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)
01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Belgium
Italy
Spain
Portugal
France
Ireland
Greece
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)
Eurozone crisis – track record & result
55
60
65
70
75
80
85
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Germany
-9
-6
-3
0
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The 3% max budget deficit
covenant was quickly
breached
(incl. Germany = precedent)
60% to GDP norm was never
reached as there was no
incentive
EA-17 general government gross debt (%GDP)
EA-17 general government deficit/surplus (%GDP)
Debt
reduction
Febelfin | 26/6/2012 6
7
Eurozone crisis –
sovereign debt evolution & outlook2008-2011 Sovereign debt evolution and 2012-2013 forecast (%GDP)
EA
BE
DE FR
IT
ES
PT
IE
GR
40
60
80
100
120
140
160
180
Debt
reduction
Source: European Commission 7Febelfin | 26/6/2012
• Increase of the systemic risk of the banking sector
• Banks are an important buyer of government debt paper
• …
Febelfin | 26/6/2012
Bank
stabilitySystemic risk
8
Banks in the eye of the storm:
the broader picture
• Observations
9
Bank run
Nationalisation of banks
Locally financed debt
National solutions
Cheap liquidities (LTRO)
Against EU spirit
Basic belief: the functioning of banks is based on trust
today no trust and more importantly no LT plan to rebuild trust
Bank
stability
Febelfin | 26/6/2012
Belgium takes the lead in ‘deleveraging’ –
transformation ongoing
Total liabilities of
Belgian banking sector
(in billions of EUR)
Total equity capital of Belgian
banking sector(in billions of
EUR)
Leverage (in units)
End of June 2007
1,595.2 48.5 31.9
End of Dec. 2011
1,147.3 52.8 20.7
% change -28.1% +8.9% -35.1%
Source: Febelfin calculations based on NBB data (consolidated basis)
Belgium is a quick learner when
it comes to deleveraging
Source: ECB
10
Bank
stability
Size of MFI's as % of GDP
200
250
300
350
400
450
98 99 00 01 02 03 04 05 06 07 08 09 10 11
EMU BE
FR DE
Size of MFIs (%GDP)
Febelfin | 26/6/2012 10
Impact on world GDP growthGrowth
EU economy is missing the lubricant of trust and confidence
Source:European Commission
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
BE DE FR IT ES PT IE GR
GDP growth 2008-2013 forecast (in %)
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
2008 2009 2010 2011 2012 2013
World
EA
Febelfin | 26/6/2012 11
EU today at a crossroads
12
Ad hoc solutions• Spanish problem
left in Spain
• Further increase of
Spanish deficit
• Senior vs junior
debt holders
….
Long term solutions• Banking union
• Eurobonds
• Fiscal union
…
Basel III – CRD IV• Middle of important changes
Crucial role of banks• Financed economy during economic
growth (until 2007) & crisis (2008- Q1
2012)
Banks directly impacted by any decision Febelfin | 26/6/2012
Main subjects of today
13
•Banking Union
•Eurobonds
•Fiscal Union
•Liikanen, Volcker & Vickers
•Basel III – CRD IV
•Shadow Banking
•Consumer protection
Febelfin | 26/6/2012
I.Banking Union : concept
14
One single cross-border supervisory
One EU-wide Deposit Guarantee Scheme
One resolution fund
Febelfin | 26/6/2012
Banking Union: general considerations
• General considerations
• No possibility for national discretion on capital requirements
• Direct recapitalization to avoid additional sovereign debt
• Strong & deep political and fiscal union required to mitigate the moral hazard risk
15
Break the vicious spiral between
sovereigns & banks
Febelfin | 26/6/2012
Banking Union: sector considerations
• Banking Union could be an answer
• To avoid regulatory competition & inconsistencies
• For effective crisis management of cross-border SIFI’s
•BUT
• Balance needed between EU-wide financial stability measures and proportionality
EU Level Playing Field
• Common DGS should take into account previous & current national DGS contributions
Profitablity
16Febelfin | 26/6/2012
Belgium: evolution DGS
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)
01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Belgium
Italy
Spain
Portugal
France
Ireland
Greece
10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)
II. Eurobonds: considerations
• Possible need for formal Eurobonds
• To lighten the interest rate burden of certain member
states
• To break the vicious spiral between banks & sovereigns
• To fund a Banking Union resolution scheme
• Eurobonds could limit the incentive for structural changes
• Eurobonds in themselves could create moral hazard
• A strong & deep political and fiscal union is required to
mitigate the moral hazard risk
17Febelfin | 26/6/2012
III. Fiscal Union: context
• Cornerstone of the eurosystem (Stability & Growth Pact, Semester and
Sixpack)
• Becomes even more acute with Banking Union
• Key in avoiding moral hazard and promoting eurozone economic
convergence as was envisioned with the Stability & Growth Pact
Moralhazard
Fiscal Union
Ensure a fiscally sound EMU & mitigate the moral hazard risk Febelfin | 26/6/2012 18
Fiscal Union: considerations
• Considerable sovereignty transfer needed
• On the short term, common borrowing on the bond market would be
required to create fiscal breathing room for currently struggling
member states
• The banking sector is indirectly suffering from the lack of confidence
in the market vis-à-vis the eurozone and member states’ outstanding
debt
19
Stabilize the market to restore confidence
Febelfin | 26/6/2012
IV. Ringfencing initiatives
Volcker vs. Vickers
20Febelfin | 26/6/2012
Issue Volcker rule Vickers Report
Separation/segregation Commercial banking and
some investment banking
Ringfence retail banking from
wholesale and investment
banking
Prohibitions Banks cannot engage in
proprietary trading and
covered funds (exemptions)
Activities that must be
offered/that are permitted
within ringfence
Scope of applications All banks benefiting from
federal insurance of deposits
All UK banks
Extraterritoriality Applicable also to non-US
banks if US criteria matched
No (only UK entities)
• European Commission appointed a High-Level Expert Group (Liikanen group)
to discuss on possible reforms to the structure of the EU banking sector
• Mandate of Liikanen Group:
• A final report of the Liikanen Group is expected in September 2012
The Group has been requested to consider in-depth whether there is a need for reforms directly
targeted at the structure of individual banks themselves and the banking system as a whole, in
order to reduce the probability and impact of failure, better ensure the continuation of vital economic
functions and better protect retail clients, and to make any relevant proposals as appropriate.
The Group will have regard to on-going regulatory reform both, in the EU and globally, and will assess the
added value of structural reform. The group will pay particular attention to on-going structural
reforms, i.e. regarding activity restrictions (Volcker Rule), size limits (Dodd-Frank Act) and/or
structural separation of certain activities (Vickers Report).
Ringfencing initiatives
Liikanen
Febelfin | 26/6/2012 21
Ringfencing initiatives
Sector considerations
Universal banks are an asset for the European economy. Ringfencing would make dissappear the advantages the universalbanking model presents for banks, shareholders and the wholeeconomy, but can’t prevent financial crises resulting from market activities
Financial sector not in favour of structural reforms (Vickers), as current ongoing regulatory reforms, including the developmentof a crisis management framework, are sufficient to reach the objectives
22Febelfin | 26/6/2012
V. Basel III – CRD IV
2017
Important characteristic Timing
Capital Stronger than in Basel II
2013
Leverage Reduce the size of activities 2018
Liquidity Survive 30 days 2015
Funding Certain funding > 1 year 2018
Febelfin | 26/6/2012 23
VI. Shadow Banking: context
No clear definition (even after 2y of discussion)
Size, reach, utility unknown
Shadow banking investigated on different levels
- EU Commission (Green paper)- Regulatory proposals Financial Stability Board (G20)
24
• Current (re-)drafting of regulatory requirements in banking, could lead tot a
growing shadow banking sector
Shadow banking will prove to be very elusive to regulate
(absence of a clear definition poses a risk of inappropriate regulation)
Febelfin | 26/6/2012
Shadow Banking: considerations
• Micro-managing the banking sector through stringent regulations on a global,
European and national level, could push financing activities into the ‘unknown’
• Effectively regulating the elusive shadow banking sector will prove to be
• Extremely difficult
• Sometimes inappropriate, as particular regulatory measures are already in
place (e.g.: UCITS for Exchange Traded and Money Market Funds)
Avoid overregulation on banks, to keep & manage the risk in plain sight
Febelfin | 26/6/2012 25
(source: Oliver Wyman)
VII. Consumer protection
EU measures
• MiFID II
• SEPA
• European mortgage directive
Belgian initiatives
• Moratorium
• Savings account
Febelfin | 26/6/2012 26
Conclusion
27Febelfin | 26/6/2012
Towards a new financial model through
dynamic and balanced regulation
Clear and stable regulation, via cumulative impact assessments
Preserve integrated EU financial market through maximum harmonisation at the European level
More coherent and consistent (implementation of) regulation
Respecting phasing-in
Sustain diversity through proportionality
Press Conference | 20 June 2012 28Febelfin | 26/6/2012 28
? Q&A
29Febelfin | 26/6/2012
www.febelfin.be