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Santander International Banking Conference “Solutions for growth and stability”
“Solutions for growth and stability” Fifth Banco Santander International Banking Conference 14 November 2012 Santander Group City Remarks by Mr. Emilio BotínGood morning.Welcome to Santander Group City.I would like to thank the authorities, financial sector representatives, analysts, andacademics for attending the Fifth Banco Santander International BankingConference.I would especially like to thank Luis de Guindos, Minister of Economy andCompetitiveness, who is accompanying me at this opening, as well as the rest of thespeakers.I am delighted to share with you my views on the current situation and the outlook forthe international banking sector.Though conditions continue to be difficult, especially in Spain, you will have noticed,from the name of this conference, that we believe the time has come to look to thefuture and examine solutions for growth and stability.To this end, today I want to speak less about the crisis, and focus instead onEurope and on banking, a sector which, by its very nature, is at the heart ofeconomic activity.Thus, my speech will address:- the importance of the European project;- the key role that banking and the financial sector must play in resolving the issues facing the Union; and- the need for a good banking culture. 1. EUROPEFirst of all, Europe.Europe is the foundation upon which Western society as we know it today hasdeveloped. For centuries it has been the cultural, intellectual, and economic centre ofthe world. 1
Many of the major ideas, political systems, technological, social and economicadvances that exist today emerged from Europe: democrac, universities, theEnlightenment, the Renaissance, the Industrial Revolution, the nation state, theseparation of powers, the rule of law, the welfare state and many others.This legacy, in itself, explains the role that Europe must continue to play on the worldstage: a stage on which Europe represents more than its constituent nations. Theworld is now organised into large blocks (the United States, Latin America, Asia), andyou need to be big in order to compete.Sixty-one years ago, Europe knew that it had to unite if it was to have a significantplace in the world.Europe has been strongest and most prosperous when it is united.Never before had Europeans experienced a longer period of prosperity than the onewhich followed the Treaty of Paris and paved the way for the euro. This process hadthree outstanding features: it was long, difficult and required clear leadership.Long because Europe could not be built overnight. The Schuman Declaration heldthat “Europe will not be built all at once, or according to a single plan.”Difficult because it had to balance different interests, which it managed bycombining hard work, generosity and imagination.The treaty that created the European Coal and Steel Community signed in Paris in1951, was printed by a French printing press, on Dutch paper with German ink. Itwas bound by Belgians and Luxembourgers and stitched with Italian silk. It is a goodexample of how individual interests were pooled to benefit the common good.The Treaty also reflects the way in which the European project was madepossible by the vision and leadership of its statesmen.In his memoirs, Konrad Adenauer, Chancellor of the Federal Republic of Germanyfollowing the Second World War and one of the founding fathers of Europe, recallshis surprise when, on the morning of May 9, 1950, he received the proposal fromFrench Commissioner, Jean Monnet, to pool German and French interests in coaland steel. This paved the way for the creation of the European EconomicCommunity.Thanks to the leadership, drive, and determination of these two historic figures, theproposal received the support of the French and German cabinets in only a matter ofhours, and Belgium, Italy, Luxembourg and the Netherlands were included in the finaldeclaration.That is how the European community was born. Ever since, Europe haspositively surprised the world on other occasions. The best example is theeuro.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 2
Monetary union required considerable transfers of sovereignty from its memberstates, which prompted a major debate. Nevertheless, in 1999, eleven countriesadopted the euro as a single currency and the European Central Bank was formed.Europe had taken a step forward, abandoning a clearly unstable system of floatingexchange rates.Few believed we were capable of implementing such a technically, economically andpolitically complex project.The benefits of the euro have been immense. It is the only currency capable ofcompeting with the dollar as a reserve currency.In macroeconomic terms, it has led to increased trade flows, more investment, andgreater competition. In the business field it has brought: improved efficiency,increased competitiveness and economies of scale, among other things.For Banco Santander, as for other major European companies, the euro has been akey factor in our growth over the last fifteen years and has given us access to newmarkets and opportunities.The euro ushered in a decade of enormous prosperity.However, when the international crisis reached Europe, we lacked the tools toprovide a rapid response.We should reflect on the fact that a financial crisis that originated in the US, andspread worldwide, struck Europe more severely than any other economic area.While most regions have managed to emerge from the crisis, or are in the process ofdoing so, we are taking far too long.We have lacked the determination needed to confront the first major crisissince the birth of the euro.The lack of a roadmap to deal with crises and of the conviction of belonging to acommon, irreversible project, have resulted in insufficient measures, implementedtoo slowly and with highly uncertain results.Europe’s response has not matched the severity of the economic situation and it hastriggered a wave of disaffection towards Europe from its own citizens, who expectleadership and solutions.We now face the tremendous task of inspiring younger generations, who have noexperience of a divided Europe, to wholeheartedly defend and strengthen what wehave built over the years.The European summit of heads of state and government last June and themeasures approved by the ECB in September represent a change of directionand clearly mark the way out of the crisis.The priority now is to carry out the agreed plan.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 3
Europe is the cornerstone of Western society, but if we do not act with speedand determination, we run the risk of being swept into decline.Let me give you some data. • Today, the eurozone has 330 million inhabitants. In just eight years time, in 2020, Brazil and Mexico will have a bigger population than the 17 eurozone countries combined. • The International Monetary Fund estimates that in the next six years the eurozone’s GDP will slip five points from the current 19% of the world economy to 14%. In the same period, the United States is expected to remain at 21%.We all know what is at stake. There is no turning back from the euro and theintegration of Europe. They are absolutely essential.It is the best approach. There is no Plan B.At Banco Santander, we are convinced that the eurozone will not break up. Theinstitutions of the European Union are firmly committed to consolidation and a strongeuro.In the past year, the European Central Bank, under the leadership of Mario Draghi,has taken significant measures, including three-year liquidity lines for Europeanbanks and the sovereign bond purchase programme approved by the central bank’sboard on September 6.Europe has gone through other institutional crises and its answer has always beenfurther integration. Now, it appears the time has come to promote political unionalong with fiscal and banking union, as endorsed by the European Council in June.Europe must move on from being a meeting place for national interests and embarkon a shared, single political direction, which puts the interests of the entire Union andall its citizens first.Europe must be one and more than just the sum of its parts.I have no doubt Europe and the euro will emerge stronger from this crisis.2. BANKINGNow I want to talk to you about banking.Any discussion on banking in Europe today implies banking union. Why?Because establishing a banking union is the best way to break the vicious circle ofsovereign debt and bank debt in which we are caught.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 4
Today we have an international consensus, not only in Europe, that banking unionis essential to break this circle. It is a key factor in shifting the conversation fromthe crisis to growth and stability. That is why we are here today.A banking union is essential in order to break the vicious circle between sovereigndebt and bank debt; harmonise the different regulatory and supervisory practices thatstill coexist within the European Union; and lastly, to reduce the fragmentation of theEuropean banking market to increase its efficiency and soundness.Banco Santander is the eurozone’s largest bank in terms of market value, branches,and customers, and I can tell you that we have found it much easier to expand inLatin America than in Europe, where we all too often run into barriers of every sort.I am aware that banking union is an ambitious, complex and difficult process, bothoperationally and politically. The goal is clear and widely shared. We cannot afford topostpone this issue.Apart from these grand objectives, what does a banking union mean forEuropeans?First, it means strengthening our financial system by enhancing supervision.As I’ve said many times before: no amount of regulation can substitute for goodsupervision.The crisis has revealed that not all banks have been subject to the same degree ofsupervision, which is one of the reasons behind the mixed performance of financialinstitutions in recent years. We must align supervisory standards.The European Central Bank is well-positioned to assume this supervisory role in theeurozone. However, it makes sense to tackle this objective progressively, with theECB prioritising oversight of the most important institutions.Secondly, banking union means enhanced transparency, thanks to a more uniformsupervisory and regulatory framework, which would include, for example, clear andcomparable criteria for stress tests. If we want a single market, there must also bea single criterion for applying the rules.This will allow clients and investors to differentiate between strong institutions andweaker ones. We would all be measured by the same standards.Moreover, once we have a single deposit guarantee mechanism and a singleresolution model, bank customers will have a simpler and clearer protectionframework.In conclusion, banking union is crucial if Europeans are to regain confidence in thefinancial system and if we, as financial institutions, are to carry out our role ofsupporting the economy and providing financial services.Europe and the banking sector must cease to be part of the problem and startbeing part of the solution.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 5
REGULATIONAlong with this key process, the financial sector is undergoing intense regulatoryreform. But, as in any post-crisis regulatory response, we must guard againstunintended consequences.Some aspects merit special attention:• In first place, Basel III requirements are affecting credit volumes and prices and, consequently, the economy. Their impact must be monitored and minimised by effectively calibrating measures and overhauling certain elements. It is also essential to revise liquidity ratios, as is currently underway.• Moreover, in order for capital ratios to be truly uniform, as Basel III intends, certain pending issues must be addressed, such as standardising the way risk- weighted assets are calculated.• Furthermore, when identifying systemically-important banks it is key to acknowledge the firewall systems introduced by international groups, such as Banco Santander’s, which consists of subsidiaries that are autonomous in terms of capital and liquidity. This model has other advantages, such as diversity and flexibility in funding and capital, as demonstrated by the recent IPO of 25% of our Mexican subsidiary.All these issues lead us to a fundamental question: How should we measure thesafety and stability of financial institutions?Clearly, many mistakes were made in this respect in the years leading up to thecrisis. The crisis triggered a profound rethink of several key elements ofbanking, such as: capital, liquidity, supervision, business structure, and riskmanagement.Now, it is essential to finish designing these reforms so that they strengthen thesoundness of the financial system and do not negatively affect growth.Alongside these reforms, we are seeing a reorganisation and restructuring offinancial systems. Spain’s case is undoubtedly the most intense and will turn it intoone of the most solid financial systems in the world.There are also proposals for structural changes in the banking sector, the mostrecent of which was the Liikanen Report. I agree with this report’s suggestion thatbanks should focus on commercial banking, thus supporting economic growth. Ialso agree with the importance of contigency and resolution plans, or living wills.Banco Santander’s clear model of subsidiaries, that are autonomous in terms ofcapital and liquidity, enabled us to present a very solid living will to our supervisors.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 6
Despite the transformative impact of all these reforms, in my opinion, the key toachieving a robust, long-term banking system and developing our role as economicintermediaries lies not so much in regulation, but in fostering a positive bankingculture.3. BANKING CULTUREAnd what do I mean by a positive banking culture?Basically, to ensure that banks properly carry out their basic functions: which are tomediate between savings and lending, manage risk and focus on the customer.A positive banking culture would have rejected the risks, lack of governance and badpractice that has destroyed financial institutions in the US, the UK, Spain and the restof the European Union. Three elements are required to achieve it.Firstly, strong corporate governance, i.e., a governance model that ensures qualityin the decision-making process including: • a well-balanced Board of Directors that is knowledgeable about the business and capable of challenging management decisions; • collective decision-making and long-term vision; • an experienced management team with clearly defined responsibilities.Secondly, in banking it is critical to have a robust and independent risk policy, i.e.,one which allows events to be anticipated, considers all significant variables whentaking decisions, and defines and governs our appetite for risk so that our decisionsare consistent with the interests of our clients and shareholders.These measures are intended to prevent excessive risk-taking in pursuit ofimmediate pay-offs, which is one of the causes of the current crisis.Risk management is the mortar of our business. Regardless of size, when themortar fails, the building crumbles. Regardless of a bank’s size, when riskmanagement fails, the bank falls.This idea is always in our minds at Banco Santander. Prudence in riskmanagement is bred into Banco Santander’s DNA. It is an issue to which wedevote a great deal of time on a daily basis, with a Delegated Board Committee, thatmeets more than a hundred times a year. This culture of prudence allows us toconsistently maintain below-average default rates in all the markets in which weoperate.Thirdly and finally, banking culture needs to return to the best practices andvalues of banking…(Back to basics)… focusing management on the needs of theclient, providing credit and financial services to businesses and families, and aboveall, putting the bank to work for the real economy.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 7
That may seem dull, but it is neither simple nor easy to do successfully. As abusiness model, it requires a great deal of experience and skill.Ladies and gentlemen:I want to summarise the three messages I’ve tried to convey here today: 1- First, Europe is at a turning point. We must understand that only a united Europe is a strong Europe. There is no turning back from the euro and the integration of Europe. It is the best approach. And there is no Plan B. 2 - Second, our priority is to solve the sovereign debt crisis, and a key step toward that end is a banking union. If we want a single market, there must also be a single criterion for applying the rules and uniform supervision. 3 - And, finally, if we want a stronger banking sector in the long-term, the answer lies in a better banking culture.As Sir Winston Churchill said: “The farther back you can look, the farther forwardyou are likely to see.”The European Union should find even more inspiration in everything it has achievedto advance firmly and determinedly towards greater fiscal and banking union with allthe benefits that can bring.Thank you very much.Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 8