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November 28, 2017

The EC Vice President Valdis Dombrovskis spoke about the future role of local and regional banks in Europe, at an event in Brussels. He highlighted the post-crisis achievements in areas such as Banking Union, single rulebook, and supervisory and resolution mechanisms, in addition to the challenges that still remain—particularly in the context of small and medium-size banks.

Mr. Dombrovskis stated: "Legacy risks from the crisis are still evident in the high levels of non-performing loans (NPLs) in certain member states. A few parts of the post-crisis regulatory agenda for banks still need to be completed. And there is not enough financial integration and private risk-sharing across member states. This reduces the capacity of our economy to absorb economic shocks and shifts more of the burden onto taxpayers to pay for the mistakes of the banking sector." Additionally, he discussed the three elements in the banking sector that the EC is focusing on to tackle these challenges:

  • Finalize the post-crisis regulatory agenda, including the banking reform package. The package, which EC presented last November, implements international standards into EU law, such as a binding leverage ratio, the net stable funding ratio, and the Fundamental Review of the Trading Book.  It also introduced measures to facilitate resolution for systemic banks. With regard to proportionality, EC proposed to reduce the reporting burden for smaller banks, simplified the calculation of capital requirements for trading-related positions, and proposed a discount on capital requirements for bank investments in certain infrastructure projects. "These adjustments were based on the Call for Evidence, our assessment of the combined impact of financial services regulation.It was the first example globally of such a holistic exercise, and others are now following suit, including the US. We will soon come out with a follow-up report taking stock and setting out future work in this regard."
  • Address legacy risks such as high NPLs. Mr. Dombrovskis highlighted the progress in this area, with rate of NPLs having come down from 6.7% to 4.5% since mid-2014. Next spring, EC is expected to present a package of measures to accelerate this trend and prevent the stock from building up again. "Among other things, it will include a blueprint for national asset management companies, measures to foster secondary markets in non-performing loans, and possible prudential backstop measures for new loans that turn bad."
  • Complete the Banking Union. This can be done by progressing in parallel on risk reduction and risk sharing. It would also lead to an Economic and Monetary Union that can better withstand and absorb any future economic shocks. He also highlighted that, "We are still missing the third pillar of the Banking Union: a European Deposit Insurance Scheme [EDIS]." Progress in this area is slow and, therefore, EC has "recently put forward new ideas to help reach an agreement. These include a more gradual phase-in, with additional safeguards to avoid moral hazard."

In conclusion, he stated: "The economic upswing is an opportunity for Europe. Let us tackle the challenges ahead quickly and work together to build a diverse, profitable, and crisis-resistant European banking sector. Local banks will continue to play an important role in the future as they face economic and technological development."


Related Link: Speech

Keywords: Europe, Banking, SME, Proportionality, NPL, Banking Union, EDIS, Banking Reform Package, EC

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