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

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.
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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:
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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.
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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.
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4. For this, crisis resolution authorities must have effective and uniform tools at
their disposal in order to:
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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.
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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.
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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.
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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.
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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:
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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.
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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.
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