Ομιλία του Υποδιοικητή κ. Παναγιώτη Θωμόπουλου
04/05/2006 - Ομιλίες
Good evening, Ladies and Gentlemen.
Allow me to begin by welcoming you to Athens and wishing you
a pleasant stay. It is a great pleasure and honour for me to address such a
distinguished audience. I would also like to seize this opportunity to thank the
European Bank Training Network and the Hellenic Bank Association for organising
this event and all of you for your participation.
My objective here today is to provide you with a brief
overview of the current developments in banking regulation that are taking shape
in the European “arena”, and to outline the main challenges that European
regulators and supervisors face, as the degree of integration in the European
financial market increases.
Before presenting you with some of my thoughts on this
subject - a subject which, I am sure, all of you know well - I should like to
say a few words about Greece, where I have a comparative advantage. Disciplined
by the requirements of euro area candidacy and membership, Greece succeeded in
lowering its inflation rate from over 16% in the fifteen years until almost the
mid-1990s to just above 3% from 2000 onwards. At the same time, GDP growth rose
from less than 1% in the first period to almost 4% over the last ten years. The
Greek economic scene has also been transformed thanks to the advantages derived
from euro area membership, including the stable macroeconomic environment and
low interest rates. The Olympic Games hosted in Athens in 2004 contributed, in
turn, to creating a favourable environment for growth. However, liberalisation
and privatisations, as well as a reinvigorated private entrepreneurial spirit,
have been the principal growth-driving forces.
This spirit has manifested itself in Greece ' s re-orientation
from an inward- to an outward-looking economy. We now see ourselves as a dynamic
part of South-East Europe, where large Greek communities, numbering hundreds of
thousands, after taking root in the distant past, continued over the centuries
to play an important role in the economic and social life of their respective
countries. The story of these communities goes back a long way, beginning in
ancient Greece, followed by 5 centuries under the Roman Empire, then continuing
for 1,000 years during Byzantium. Then came nearly 600 years of Ottoman rule and,
more recently, the communist take-over of these countries, which resulted in an
expulsion of all non-communist Greeks. After an interlude of some 50 years, the
historic forces are back at work. More than 5,000 Greek companies now operate in
the neighbouring Balkan countries and are among the main foreign investors in
Bulgaria, Fyrom, Romania, Albania and, more recently, Serbia. This development
has resulted in a delocalisation of Greek industry to our neighbouring countries
and a steady inflow of migrant workers to Greece.
The Greek banking sector has also undergone a radical
transformation, evolving from the highly regulated sector it was 15 years ago,
when the Bank of Greece set over 150 different levels of interest rates to
become a free, competitive and dynamic sector and a key pillar in Greece’s
successful economic performance. Despite their relatively small size by European
standards, the Greek banks ' high profitability has enabled them to build sound
foundations. Just like other sectors, the Greek banking sector has also expanded
to South-East Europe. This offers Greek banks the opportunity to benefit from
the growth potential of a rapidly developing region with low levels of financial
intermediation, to increase their size and efficiency, and to continue to
flourish in the very competitive international financial environment. The market
penetration of Greek banks, based on their total assets in the neighbouring
countries, ranges from 11% to over 30%. Moreover, the foreign claims of Greek
commercial banks on the Balkan region countries have reached almost €11 billion,
which represents 25% of Greek banks’ total foreign claims and 58% of their own
funds.
Unfortunately, the state of the Greek economy is far from
rosy and many challenges still lie ahead. After euro area entry, fiscal
discipline was relaxed and during the last five years the fiscal deficit has, in
fact, worsened. Only this year has it been budgeted to fall below 3% of GDP,
while continuous efforts will have to be maintained to reach a balanced position,
as required by the EU.
Moreover, the euphoria after euro area entry prompted a
'' money illusion '' with labour unions demanding and obtaining high nominal wage
increases, regardless of the impact on real incomes and unemployment, as a
result of the the loss of external competitiveness. This makes it even more
urgent and imperative to raise productivity growth further and develop high
value- added activities. We, therefore, need to intensify our structural
adjustment efforts in the labour and product markets, promote innovation and
technology, and ease bureaucratic restrictions, as recommended in the Lisbon
agenda. My personal opinion is that the morass of bureaucracy is the main
impediment to a faster rate of growth. The Greek banking sector thus faces a
double challenge: it has to apply all of the new regulations, control mechanisms
and risk-based methods (Basel II), while expanding rapidly both in Greece and
abroad, and, at the same time, from a risk management and internal control point
of view, it has to rapidly integrate its subsidiaries and branches in South-East
Europe, where the environment still differs from that of the average euro area
country. Expansion toward potentially much larger markets - Turkey, Poland and
Egypt today and Ukraine tomorrow - calls for even better internal risk exposure-monitoring
systems. This is a parameter which the new capital adequacy framework, in
combination with the recently established regulatory framework on internal
control, deals with.
The Bank of Greece, as the supervisory authority, has indeed
been adapting its regulatory and supervision apparatus to deal with the new
challenges, and has encouraged the banking sector to maintain a high Capital
Adequacy Ratio (13% at the end of last year). This provides a more than adequate
buffer against the fact that uncovered non-performing loans are still slightly
higher in Greece than on average in the euro area and the fact that Greek banks
are still benefiting from a favourable cyclical phase and, therefore, have not
yet experienced the adverse effects of a slowdown. In parallel, given the
specificities of Greece ' s banking system and economy, the Bank of Greece has
imposed stricter measures on some banks (e.g. a CAR much higher than 8%).
Likewise, given the rapid growth of lending to households (30% on average since
2001), the Bank of Greece has instructed banks that debt-servicing burdens on
households should not exceed 30-40% of disposable household income. While
adhering to the risk-based approach, which gives individual banks more freedom
to estimate their possible losses and manage their own risks, the Bank of Greece
considers that the supervisory authorities should always be alert (not to say,
vigilant) and, when necessary, not only adjust the capital requirements of
individual banks, but also periodically test the internal control mechanisms and
risk management systems, in the context of Pillar III. Only as a last resort
should other more direct measures be applied.
CURRENT DEVELOPMENTS
Now, getting back to the subject of today ' s conference:
During most of the 1990s, efforts in the financial services sector were focused
on achieving a smooth changeover to the single European currency. However, once
the euro was successfully introduced, attention shifted to improving the
functioning of the single European financial market. The late 1990s saw the
launching of an ambitious plan - the Financial Services Action Plan - , which
contained a series of legislative and other measures that would allow the
European financial services sector to gradually realise its full potential.
Since then, major changes have taken and are still taking
place in the financial regulation landscape. The most outstanding of them, in
the banking sector, is the forthcoming new capital requirements framework, which
is one of the final measures of the EU Financial Services Action Plan.
The new capital requirements framework
The new Directive - or CRD as it is called - will make the
existing banking supervision framework more risk-sensitive and will promote
enhanced risk management among financial institutions. This should improve the
effectiveness of the framework in ensuring financial stability, maintaining
confidence in financial institutions and supporting the macroeconomic
environment in general. Improved risk-sensitivity in capital requirements should
facilitate a more effective allocation of capital, thus contributing to boosting
the competitiveness of the EU economy. There has, however, been some discordance
of opinion about certain aspects of the CRD, which has fortunately been largely
resolved.
The new Directive is, in fact, a new supervisory framework of
a rather revolutionary nature, adapted to the globalised world we live in. Apart
from introducing new approaches for the calculation of capital requirements, the
CRD provides for the establishment of intensive cooperation and information
exchange mechanisms among supervisors, the option of delegating tasks among
supervisors, information exchange requirements among banking supervisors,
central banks and finance ministries in emergency situations, and - a completely
new element - disclosure requirements both for banks and for supervisors.
Of the above-mentioned elements, one issue that has sparked
much debate and, to some extent, controversy, is the allocation of supervisory
tasks or responsibilities between the home and the host supervisor, i.e.:
(i) the authority that supervises the parent bank (i.e. the
consolidating supervisor) and the authority that supervises a ''significant''
subsidiary bank or
(ii) the supervisor of the bank located in the country of
origin and the supervisor located in the country where a ''systemically relevant''
branch is established.
The main concern in this debate is finding the right balance,
so as to enhance the efficiency of the supervisory arrangements, while ensuring
their effectiveness and respecting the existing accountability arrangements at
the national level.
The Bank of Greece has a strong interest in the outcome of
this debate, in which it actively participates, in the hope that an optimum
balance will be reached. Needless to say, this interest also reflects the fact
that the Bank of Greece is both the host supervisor for incoming EU banks and
the home supervisor for outgoing Greek banks, which are expanding mostly to the
neighbouring Balkan countries, some of which are preparing to implement the EU
framework. In performing its roles, as mentioned above, the Bank of Greece
consistently follows policies that encourage the European integration process
and refrains from creating unnecessary administrative burdens or erecting other
obstacles, without, of course, putting the effectiveness of its supervisory
tasks at risk.
Other regulatory initiatives
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In parallel with the preparation for the new supervisory
framework ' s implementation, discussions are under way regarding the revision
of the Directive on Deposit Guarantee Schemes and the Electronic Money
Directive.
-
Another major issue that has sparked considerable
controversy concerns the so-called supervisory approval process. The debate
was initially triggered by certain market participants, who fear it to be an
obstacle to cross-border mergers and acquisitions. The Bank of Greece and
the central banks of many other countries have repeatedly stated that
isolated cases, in which a misuse of supervisory powers may have occurred,
should not be generalised. In Greece, as it is the case in the EU as a whole,
the supervisory authorities base their decisions regarding the merger or
acquisition by a foreign institution of a domestic bank strictly on
supervisory criteria.
The new decision-making structure for financial services
Apart from the introduction of the new capital adequacy
framework, another radical change that has been introduced involves the decision-making
process at the EU level for the financial sector, also known as the Lamfalussy
process. A new financial services committee architecture has been established.
The Lamfalussy approach, which was originally elaborated for
the securities sector, now extends to the banking and insurance sector, as well.
Given the time constraint, an extensive presentation of the Lamfalussy framework
would probably be inappropriate. However, there is reason to underline some of
its main objectives, which are:
-
to develop regulation that can adapt quickly to new
market developments and practices, support integration and enhance EU
competitiveness, and
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to strengthen cross-border and cross-sector cooperation
among supervisory authorities and the convergence of day-to-day supervisory
practices and implementation.
It is worth mentioning that the new decision-making structure
has not yet reached its full potential. On the one hand, there is a some concern
about the potential proliferation of work among the various committees and
working groups and the consequent risk of confusion and wasted resources. On the
other hand, the process has started to yield significant benefits, especially in
the field of supervisory convergence, which should overcompensate for few
negative aspects.
The Committee of European Banking Supervisors (CEBS)
The CEBS, as part of the Lamfalussy framework, is the
institutional committee that brings together all the banking supervisors of the
EU countries and the central banks, including the ECB, as observers. The CEBS
has three main tasks:
to provide advice to the Commission;
to ensure the consistent implementation of Community
legislation in the banking sector and the convergence of supervisory practices;
and
to promote supervisory cooperation and exchanges of
information.
The CEBS has an advisory role within the EU legislative
procedure. The CEBS’s other focus is to promote a consistent approach to banking
supervision through increased convergence of standards and practices and
enhanced cooperation and information sharing. The ultimate goal is to build a
common supervisory culture and a practical operational network of banking
supervisors within the established EU legal framework. This is of particular
importance for the efficient supervision of cross-border banking groups, as the
appropriate dissemination of information relating to risks and the elimination (if
possible) of work duplication are expected to reduce the administrative burden
and costs for the supervised institutions, while reducing the strain on
supervisory resources. This does not mean that there are no benefits for smaller
institutions, with a predominantly domestic or even local focus, as convergence
will imply the establishment of a level playing field across the EU.
NEXT STEPS
Changes in the regulatory framework and the organisational
structure of the decision-making process are necessary but not sufficient
conditions for the realisation of the EU financial market ' s strong growth
potential. This can be more easily achieved if financial integration is
accelerated. This belief is the driving force behind the new EU financial
services strategy for the next 5 years, which is currently under discussion
among the EU institutions, while, at the same time, market participants are
being consulted.
Up to now, the elements that seem to be part of this strategy
and are closely related to the banking sector are the completion of certain
ongoing projects (i.e. mortgage credit, consumer credit, the New Legal Framework
for Payments, etc.) and the undertaking of new legislative initiatives (i.e.
investment funds, bank accounts, credit intermediaries).
One of the legislative initiatives that requires special
attention is the proposal for a Directive on payment services. The proposed
Directive, which is part of the wider Single European Payments Area Project,
aims to establish a modern and harmonised legal and operational framework
necessary for the creation of an integrated retail payments market, which would
enable payments to be made more quickly and easily throughout the EU. The
proposal also aims to introduce more competition in payment systems and
facilitate the realisation of economies of scale. This will improve efficiency
and reduce the cost of payment systems for the economy as a whole, an issue of
high importance to the Bank of Greece, as electronic payments systems are not
very much in demand in Greece.
FUTURE CHALLENGES
Supervisory architecture within the EU
Lately, several discussions have revolved around the issue of
the EU supervisory architecture, one of the arguments being that the complexity
of supervisory arrangements increases in parallel with the growth of a banking
group ' s cross-border activity. Without dismissing these concerns, we do not
share the view that the conduct of cross-border activities is connected with a
significant supervisory burden. On the contrary, the most important obstacles to
the expansion of cross-border activity in the banking sector are the differences
in the tax treatment of banking products among different states, cultural
differences and the lack of proximity (except in the case of branches).
Different views on the supervisory architecture advocate
alternative models of supervision, ranging from complete centralisation to total
decentralisation. Each approach has its own merits, but also raises a number of
complicated strategic and operational issues that need to be addressed.
I believe that in no way should extreme solutions be adopted
and instead implement the Lamfalussy approach, which though is not a panacea,
has the definite advantage of allowing for a lot of flexibility. First of all,
it provides for a range of different degrees of centralisation in the regulatory
process, which would entail a more or less harmonised set of rules depending on
the issues that need to be addressed. In this way, it facilitates the swift
adaptation of community legislation to new developments in the financial markets,
which in many cases have cross-sectoral dimensions. Moreover, it boosts
regulatory and supervisory convergence while at the same time allowing for the
efficient handling of differences arising from the fact that the vast majority
of the 8,000 credit institutions in the EU operate domestically and sometimes
even locally, in markets with diverse characteristics and which can better be
assessed by local supervisors, as the history of the last 50 years has taught
us.
In this context, I think that we can go a long way with the
Lamfalussy framework. And I do not think we are anywhere near the stage where we
can say that we have fully exploited all the possibilities it has to offer, at
least in the banking sector. In addition, the Lamfalussy framework and the way
it is applied will evolve over time in response to the evolution of markets.
THE EUROSYSTEM ' S PERSPECTIVE
I would like to conclude my speech with a specific reference
to the Eurosystem ' s perspective of the above-mentioned regulatory developments.
It is worth noting that the Eurosystem ' s primary relevant concern stems from the
fact that it is responsible for monitoring financial stability in the euro area,
and at the same time recognises that a smooth-functioning financial system is a
vital transmission mechanism for ECB monetary policy.
Within this context, the forthcoming implementation of the
new capital requirements framework, as well as the strengthening of supervisory
cooperation within the EU, are seen as particularly encouraging developments, as
they considerably enhance the existing financial stability framework.
Of course, as the financial market landscape changes and the
degree of European financial integration increases, new concerns are likely to
arise, regarding, for instance, the ability of the system as a whole to respond
to a possible emergency situation in a timely and effective manner.
The Bank of Greece, as a member of the Eurosystem, keeps a
close eye on developments, while participating actively in the respective
discussions within the EU institutions for the establishment of common
arrangements.