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Opening remarks by Emilio Botín at the Sixth Santander International Banking Conference

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Opening remarks by Emilio Botín at the Sixth Santander International Banking Conference

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Opening remarks by Emilio Botín at the Sixth Santander International Banking Conference

  1. 1. VI International Banking Conference 5th November 2013 Address by Emilio Botín Good morning. Welcome to the Santander Group City. I would like to thank the authorities, ambassadors, representatives of the financial sector, analysts and academics for attending the Sixth Banco Santander International Conference. And especially;  the Minister of Economy and Competitiveness, Luis de Guindos,  and the Vice President of the European Central Bank, Vítor Constancio, who are here with me for the opening ceremony,  and also the rest of the speakers at this annual event, which is one of great importance for us at Banco Santander. 1.- Introduction A few weeks ago was the fifth anniversary of the collapse of Lehman Brothers, which marked the beginning of the Great Recession and the subsequent crisis in the euro area. This crisis has been the severest and longest in our time. The causes and consequences have already been well identified and analyzed and a great job has been made to resolve them. Today, on much firmer ground than in 2010, we can affirm that the recovery of the world economy is underway:  World economic growth will depend especially on the advanced economies. The U.S. is leading the way, but Japan and the U.K are clearly at a turning point and the Eurozone economies are beginning to grow.  The emerging economies are tackling the structural reforms needed to make their growth more sustainable and increase their potential. In particular, I would like to stress my confidence in Brazil and the rest of Latin America.  Thirdly, the risk of having to face more extreme adverse scenarios is now behind us. We only have to recall the situation and the doubts surrounding the Eurozone this time last year. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 1
  2. 2. Given the more positive economic scenario, it is now time to talk about the future and the role of the financial system. Now is the time to examine whether the international financial system is emerging from the crisis reinforced, restructured and with the tools it needs to support growth in the real economy. Today, I will address two main questions:  Have the reforms the international financial system needs been carried out?  Is the banking sector ready to fulfil its principal role; that of providing sufficient credit to the economy? 2.- The Banking Sector The crisis has shown that the less complex customer-focused banks, with good corporate governance, have proved to be more resilient and sustainable and have acted as a benchmark for many of the reforms that have been set in motion. In these five years, there has been great progress in putting in place the regulations and tools needed to make institutions more solvent and resilient, and the sector as a whole stronger. Today, institutions have:      More and better capital, with higher, more comparable and better defined ratios A framework to regulate liquidity, for the first time Crisis resolution mechanisms More focus on and attention to risk management, and greater transparency. Capital and leverage ratio In terms of capital, the amount of top quality capital required in the industry has multiplied by between three and five times. This vastly increases the sector’s capacity to absorb losses. I will give you just one statistic: Eurozone banks have increased their core capital by 600,000 million euros since 2007. An issue still pending is the alignment of risk-weighted asset calculations, which will ensure different countries have comparable ratios and thus prevent the current fragmentation of the financial system. This issue is of utmost importance, as highly significant differences have been detected. I repeat, highly significant differences, that can hamper the comparison of solvency ratios between institutions in different Eurozone member states, to the detriment of the most conservative. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 2
  3. 3. What we cannot permit, under any circumstances is for capital ratios to lose their high sensitivity to risk, something that has been achieved through many years of analysis and assessment. That would be an unjustifiable backward step. Leverage ratios cannot become the main benchmark for institutions’ solvency, since they have no element of risk assessment. What is more, they penalize institutions for holding risk-free or very low risk assets. Let us focus on giving this ratio its proper role, which is: to act as a reference to discourage the excessive leveraging that played such a big part in the crisis. In this sense, I think it is highly appropriate that the European Central Bank sees the leverage ratio as a complementary measurement of capital in the balance sheet analyses it will carry out on institutions under its supervision. Liquidity Banks’ liquidity is the second element of financial reform and will be regulated for the first time, which is positive in itself. The crisis made it very clear just how damaging it was to ignore liquidity. However, the regulatory framework still needs fine-tuning and should not focus only on quantitative ratios. Otherwise, there might be disproportionate requirements that put excessive limits on the banking sector’s role in maturity transformation, which is always so necessary, and even more so at the present time. In order for an institution to carry out its activities, its liquidity levels should be appropriate for its business model. The stability provided by liquidity originating from customer deposits is a highly-valued asset for retail and commercial banks. Crisis resolution I would now like to talk to you about crisis resolution, the third element of regulatory reform and one that, in my opinion, is a real revolution. I cannot agree more with the principle that taxpayers and well-managed financial institutions should not have to bear again the costs of a financial crisis. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 3
  4. 4. For this, crisis resolution authorities must have effective and uniform tools at their disposal in order to:     Prevent financial crises Manage difficult situations in an orderly manner Allow banks to fail when necessary, and Minimize the cost for everybody: for the system itself and for society in general. A basic instrument for this is the so-called ‘bail-in’, which allows for an institution’s shareholders and creditors to be the first to shoulder losses, instead of the taxpayers, while, as should be, always protecting deposits. And of course, we financial institutions must also move forward. Banco Santander has always firmly defended viability and resolution plans, and, as you know, we were the first international financial institution to present a ‘living will’ to our supervisor. Banco Santander’s model, which is based on subsidiaries that are autonomous in terms of capital and liquidity, is very well explained in our viability and resolution plan. It includes firewalls between countries to reduce the bank’s systemic risk, as is reflected in our systemic institution, or SIFI, surcharge of only 1%. It is important for financial institutions to be allowed to choose a resolution strategy in line with their group structure. I refer to the models known as:  Multiple point-of-entry  Single point of entry In Banco Santander’s case, it is clear that the multiple point of entry model is the most appropriate. All these advances in improving capital and liquidity, and in crisis resolution frameworks, mean we can affirm, loud and clear, that the financial sector as a whole is much more solid than it was before the crisis. I would like to highlight four ideas to consolidate this progress:  First: There are still voices that urge us to go far beyond Basel III in capital requirements. In my opinion, this could be counter-productive: the marginal contribution to security for the system is minimal and does not compensate for the decline in credit flows it would cause.  Second: Regulating only the banks does not resolve the problem. Any analysis of the crisis shows that all segments of the financial sector were involved, and, in particular, shadow-banking. We consider highly positive the initiatives taken by the Financial Stability Board to review these issues in depth. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 4
  5. 5.  Third: Let us not forget the importance of supervision. As I have been saying for several years, no amount of regulation can replace strict supervision. And by strict supervision, I mean close supervision, that permits a sound understanding of institutions and, above all, ensures good risk management.  And fourth: Everyone has been focusing on the sector’s stability and strength. Perhaps we have not paid enough attention to the need for it to be profitable. I said: profitable. I share the view of some regulators. We have gained much in terms of security in the financial system, but we cannot forget that all of this comes at a cost. Let us hope that this new phase of financial stability we are starting will also be one of regulatory stability, so that the sector can focus on the profitability of its business and its essential role in the real economy. The sector has to be profitable in order to be sustainable in the long term, to attract investors to support business development and to be up to the task of meeting customers’ needs. In banking, we need to be highly aware of risk, while bearing in mind the cost of the service we provide and the long-term profitability of our business. 3. Trust I will now refer to the second question I raised at the beginning of my address, as to whether the financial sector is ready to play its role in the economy. We cannot look at this question without speaking of trust. As you well know, and as the president of the FSB and governor of the Bank of England, Mark Carney, has pointed out before, the word “crédito” in Spanish, “credit” in English and also “kredit” in German, all derive from the Latin “credere”, which means “to trust”... In order for the progress achieved in the financial sector to truly permit the flow of credit and greater economic growth, we need to restore trust. The best way to do this is by completing Europe’s Banking Union. Banking Union The steps the European Union has taken towards Banking Union are the key to finally restoring trust in the euro, in our financial sector and the future of a more integrated and solid Europe. I am convinced it will have positive repercussions for the world economy as a whole. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 5
  6. 6. In 1950, Robert Schumman, then French Minister of Foreign Affairs, said: “Europe will not be made all at once, or according to a single plan. It will be built though concrete achievements.” Well, banking union is the key to solving many of the problems we are experiencing in Europe, such as:  The vicious circle between sovereign risk and banking risk;  Market fragmentation; and  Higher financing costs for many businesses. Market fragmentation and its effect on lending arise from the fact that the transmission of monetary policy, which takes place through financial institutions, is not working properly. This is because banks, and this is very important, depending on the specific country where they are headquartered, are penalized by sovereign risk. Let me give you a specific example that affects Banco Santander. Our stand-alone rating, which reflects our basic strengths and inherent characteristics, according to Standard & Poors, is “A -”, which is higher than that of other major European and North American banks. After including sovereign risk, our rating falls to “BBB”, whilst that of those other banks rises to “A”. Likewise, it is not reasonable, from the risk point of view, that a first-rate Spanish company should have to finance itself at much higher spreads than other European companies, simply because it is headquartered here. It seems clear that in a Monetary Union such as ours, economic and financial players should only be differentiated in terms of their risk and not their nationality. 2014 has to be the year in which the vicious circle between sovereign and banking debt is finally broken, and not just for the good of the banks, but also for the sake of the individual customers and companies we serve. All this will increase the flow of credit to companies and individuals, contributing to economic growth and job creation. At Banco Santander, we strongly support the Single Supervisory Mechanism, which, I am sure:  Will reinforce confidence in the European banking sector, making it more solid and resilient,  Will ensure a level playing field for institutions, and  Will encourage better corporate governance in banks, as they will be judged by their management and not by their country of origin. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 6
  7. 7. Establishing a Single Supervisor is a decisive and irreversible step in Europe’s financial integration. But Banking Union would not be complete without a Single Resolution Mechanism to provide the tools to manage banking crises in Europe:  effectively and conclusively, and  independently of the institution’s nationality. For this, it is necessary to have a single authority with well-defined powers and access to a Single Bank Resolution Fund, which will be act as the last resort in the event of a crisis in any institution. We must work decisively in this direction and achieve it sooner rather than later. There are times when speed is justified. We should also be ambitious, to ensure strong foundations and all the solidity the European financial sector needs. In the coming quarters – even before the single supervisor begins to operate important steps will be taken towards Banking Union. I am referring to the “comprehensive assessment” to be carried out by the European Central Bank of the institutions that will come under its supervision, which consists of three elements:  A “risk assessment”, or RAS, to assess institutions’ global risk profile  An assessment of portfolio quality, or Asset Quality Review (AQR)  And a stress test, to be carried out in coordination with the European Banking Authority (EBA). We at Banco Santander value this exercise very positively, for several reasons:  It is rigorous and transparent,  Because it uses standard definitions, which are essential to guarantee a level playing field,  Because it includes all types of on- and off-balance-sheet assets, with a special focus on more risky assets, ......  Because national regulators, which are well acquainted with the strategies and business models of institutions, will be involved in the different stages,  And also, because the European Central Bank will ensure consistency and quality of information at all times. I have no doubt that these exercises provide a definitive opportunity to assess and discriminate between institutions and to ease all doubts about the sector in Europe once and for all. In this sense, the experience in Spain is conclusive. The Spanish banking sector has been subject to a detailed analysis within the framework of the Memorandum of Understanding. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 7
  8. 8. This framework has enabled a clear distinction between healthy institutions and those whose solvency and viability were very much impaired. This was the case for most of the savings banks, which are those that received state aid. The Financial Aid Programme has made it possible to restructure the sector in Spain in depth and recapitalise the institutions that needed it. Today, we can confidently say that the Spanish banking sector is one of the soundest in Europe. Europe needs a strong financial sector that generates confidence in investors and customers alike. The Europe of the future needs a great European banking sector that is:     efficient and profitable customer-orientated innovative cross-border, and, therefore, able to share best practices among countries, support companies’ international expansion and the integration of Europe’s economies and markets. As with any good ecosystem, maintaining a variety of species is essential. We need small, local banks and also large, regional banks. What is important is good risk management and good corporate governance. Banks that are healthy and solvent are essential to provide European businesses with all the support they need to grow, occupy positions of leadership and contribute to international development. In short, in order to continue to build confidence in the international financial sector, we must keep working in three directions:  Firstly, the financial sector has to continue to regain the confidence of customers, regulators and other institutions themselves. Since October 2008, much progress has been made in financial reform.  Secondly, we need to increase market confidence in banks by working on common rules and greater transparency to enable investors to judge and assess institutions, and  Thirdly, we need to be certain we have learned from the errors of the past. The key lies in: o appropriately evaluating all risks, o being highly disciplined in managing risk o and having good supervision. None of the effort that we put into recovering confidence will be in vain. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 8
  9. 9. This is the greatest asset we possess and it is vital in order to achieve the common objective we all share: the sustained development of our economies and the wellbeing of our citizens. As I said, achieving Banking Union and, through it, recovering confidence, is the key for credit to flow normally and to firmly consolidate the recovery that is already underway. 4. Conclusions We have already come a long way, and, as I said at the beginning, we can start to be more optimistic about the future. Now is the time for banks to be proactive and focus all their energy on creating wealth and jobs. We will be able to say that the crisis is finally over when people are talking less about banks and more about companies. We at Santander continue to stick to our business model and to the best international retail and commercial banking traditions, based on:  focus on the customer  good corporate governance  strong capital and liquidity  and prudent risk management. You may rest assured that Banco Santander is clearly committed to the economic recovery and to supporting households and companies. With sound, business-focused banks, an efficient supervisory system, strong, capable institutions, and firm, responsible policies, we will be able to consolidate this economic recovery and to look ahead with the satisfaction of having successfully overcome these great challenges. Thank you very much. Emilio Botin’s remarks at the VI Santander International Banking Conference – 5 November 2013 9

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