Eurocommissaris Almunia over de bankencrisis in Europa en Ierland (en)

Ladies and Gentlemen:

Let me thank the Federation of International Banks in Ireland for giving me the opportunity to address such an impressive audience on the occasion of your annual lunch.

I would like to start by paying my personal tribute to the memory of the late Brian Lenihan. In the years when we worked together, Brian has always struck me as being unusually bright, brave and energetic - he was a man of great personal courage.

My heart goes out to his wife and his two children. He will be greatly missed both in Ireland and in Europe.

Ladies and gentlemen:

I am very glad to have this opportunity to meet with representatives of domestic and foreign banks, government authorities, and regulators.

I would like to share with you my views on Ireland’s banking sector from the vantage point of the competition authority for the EU internal market.

To do this, let me quickly recall the milestones of the crisis and of the responses taken at European level.

In September 2008, a financial storm broke out and the disruption in the financial markets rapidly spread to the real economy.

The impact on the economies of the Union was major.

Even though some recent growth figures at the EU level are encouraging, the legacy of the crisis is still with us and is much broader than GDP levels.

That this would not be a cyclical downturn was immediately clear three years ago.

It was also clear that the countries of Europe would be able to contain the crisis only if they played as a team.

Fortunately, we did so most of the time. Under the EU umbrella, the response was rapid, massive and coordinated. And the response of the ECB has been outstanding during this period.

As early as November 2008, the Commission presented the European Economy Recovery Plan to coordinate a fiscal stimulus for the whole Union.

At the same time - through the application of the State aid rules - we started to coordinate the efforts of the EU countries to restore liquidity and capital in Europe’s troubled banks; help them deal with their impaired assets; and provide guarantees.

We are adopting new regulations to tackle the failures we observed in our pre-crisis financial legal framework. And we put in place the new EU supervisory authorities.

Finally, in May last year, the Commission and the Member States in the euro area took the first steps in their response to the sovereign debt crisis in the euro area with the new financial-stability mechanism and facility.

None of this is new to you, but I’m recalling these events to show how vital our membership of the Union can be when the going gets tough.

The story also serves as background for the response that came from the EU competition authority.

Adapting our control of State aid to fit the unprecedented support that Europe’s governments lent to financial institutions has been essential for the success of the overall response of the EU.

Ireland’s banking crisis - and in particular the first measure taken unilaterally by the Irish authorities when they offered a blanket guarantee to Irish domestic banks - triggered our response.

Our emergency rules had three main goals:

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  to keep to a minimum the competition distortions of government bailouts and other measures;
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  to preserve financial stability; and
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  to help financial markets resume normal lending and other operations as fast as possible.

The impact of our temporary regime across Europe shows that it was timely and needed.

Between January 2007 and December 2010, distressed banks in the EU effectively received aid for an amount in excess of €2,000 billion. This is the figure for amounts used, and it is staggering.

Since the start, competition policy adapted to the situation trying to strike a balance between urgent short-term needs and long-term considerations.

On the one hand, we helped countries weather the storm and preserve financial stability.

At the same time, we made sure that the public support came with conditions that would give banks an incentive to pay it back and would prevent abuse at the expense of unaided competitors.

On the other, we have always kept our eyes on the market landscape that would emerge from the crisis as we helped countries rebuild their banking sectors on firmer ground.

Tighter regulation and competition enforcement have been working side-by-side to reform the financial sector and make it more stable and transparent.

For example, the forthcoming proposals on capital requirements and crisis management and resolution are part of a new regulatory regime designed to avoid that banks will again pose a systemic threat and will need to be rescued again using taxpayers’ money.

Ladies and Gentlemen:

I will now turn to Ireland’s situation.

I do not need to emphasize the challenges faced by the country as it moved from a banking crisis to difficulties with its sovereign debt.

The global crisis was the trigger but not the main cause of Ireland’s financial woes, originated in excessive and careless lending by the Irish banks to the commercial real estate sector.

To make matters worse, these loans were primarily funded by short-term wholesale funding.

Other factors that contributed to the crisis include a regulatory failure to assess risk in traditional lending.

Let me give you a few key facts to gauge the extent of the Irish banking crisis and of the public intervention.

The crisis threatened the stability of all domestic banks and significantly altered the competitive landscape in Ireland’s banking market.

Irish banks have received significant State recapitalisations - €46.3 billion have been granted so far - and will transfer around €75 billion of commercial land and development loans to the National Asset Management Agency.

As to foreign banks, four of the five institutions with the biggest operations in Ireland have also received government support. After the crisis, KBC and Rabobank have reduced their activities and Lloyds has left the Irish market altogether.

The implications of the rescue for the public coffers is huge.

The total amount Ireland spent to recapitalise its banks over the course of the crisis is equivalent to about one third of its GDP in 2010.

No other EU country comes even close to this proportion. The next in line are the Netherlands with 6.3%, Belgium with 5.4% and the UK with 4.4% - all countries with large banking sectors compared to the size of their economies.

The rescue has left deep marks in Ireland and has strained its public finances.

Most importantly, we should not forget the social implications. The people of Ireland are bearing the brunt of the crisis and are enduring the effects of tough austerity measures.

In the face of these difficulties, I have carried out my responsibilities toward Ireland with extra care without departing from our general objectives, which are:

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  returning institutions to long-term viability;
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  ensuring sufficient burden sharing from the banks, their shareholders and subordinated debt holders; and
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  introducing measures that limit distortions to competition.

In addition, we have often invited the national authorities to carefully compare the cost of saving a bank with the cost of its liquidation - as was eventually the case for Anglo-Irish Bank and the Irish Nationwide Building Society.

Recognising the collapse of the two institutions - largely determined by their own risky lending and unsustainable funding - the Irish authorities have decided to merge them and wind down their assets in an orderly manner.

I will be proposing a decision approving the aid for the resolution of Anglo and INBS by the end of this month.

The cost for taxpayers in these operations has been extremely high, and the margin of manoeuvre to seek burden sharing from senior bondholders was limited by the blanket guarantee granted by the authorities in 2008.

The cost was partially reduced by the burden-sharing achieved with regard to subordinated debt holders. Irish banks are currently conducting voluntary liability-management exercises on this type of private debt.

I would like to clarify a common misunderstanding in this context.

When we approve an aid measure, we do not assess the appropriateness and effectiveness of State spending. It is up to the government to decide whether to grant aid. What we do is ensure that the aid is granted in line with EU law.

This means that we verify that the aid is used to restore the long-term viability of the bank or to allow its orderly liquidation.

We also check whether the bank and its capital holders contribute to the cost of the rescue; e.g., by requiring that the State capital is remunerated.

And we require measures to compensate for the competition distortions caused by the aid - for example divestments and behavioural constraints on the beneficiary of the aid.

Let us now turn to the current situation.

The massive restructuring of the Irish banking sector is taking place in a specific institutional set up.

The EU/IMF programme provides an envelope of €35 billion to assist in the restructuring. The defining elements of the restructuring are part of the programme, agreed between the Troika and the Irish authorities.

And the restructuring will have to occur in full compliance with EU State aid rules, whose principles are reflected in the programme’s conditionality.

How will we proceed in concrete terms?

Now that the capital and liquidity reviews of the Bank of Ireland, Allied Irish Banks, the Educational Building Society, and Irish Life and Permanent have been completed, the focus must shift to implementation.

The capital increases need to take place in a timely fashion. The banks also need to move ahead with their deleveraging plans and reach a loan-to-deposit target of 122.5% by the end of 2013.

In parallel, the banks covered by the capital adequacy and liquidity review will have to submit restructuring plans by the 31st of July, 2011; based on the deleveraging plans submitted to the Central Bank of Ireland and to the Troika.

However, let me stress that the Commission will look beyond the duration of the programme, as restructuring plans have a five-year horizon.

Among other things, we need to see good evidence that the banks will continue to stay on the path to viability beyond the end of 2013.

The restructuring plans will also have to show that there is sufficient burden-sharing; and that the distortions of competition caused by the aid are properly addressed.

As a result of the Irish authorities’ strategy to build the new banking system on two pillar banks, the Bank of Ireland and Allied Irish Bank will work in a de facto duopoly in the Irish market.

As European Commissioner for Competition, let me say that this prospect will require close surveillance, because duopoly may hamper competition in Ireland’s banking market.

I expect that the Irish authorities will ensure the best conditions for efficient competition in the market. We will work with the Irish authorities and the banks to this effect.

We need to make sure that a competitive fringe of new entrants can take advantage of the improved economic environment when demand picks up again.

Ireland needs an open and contested market for financial services and products to finance its growth in the future.

Ladies and Gentlemen:

Ireland’s banking crisis has taught us useful - and sometimes painful - lessons.

First, macroeconomic imbalances need to be corrected before they become intractable, even when public finances are in a sound position.

Second, it has shown that it is possible - and absolutely necessary - for different international bodies to work together and address sovereign and banking challenges at the same time.

Finally, that it is no longer possible to allow the banking sector to grow out of proportion relative to the size of a country’s economy. Therefore, macro-prudential supervision should be a lot tighter, both at national and at European level.

In the new landscape that is emerging from the crisis, deleveraging will be key to right-size the banks. The Irish economy needs smaller, more robust and more prudent institutions.

We will support the government’s plans to bring the banking sector back to private ownership and to market discipline as soon as possible.

In particular, the funding currently provided by the European and Irish central banks will have to be replaced by retail, low-risk, and longer-term market funding.

Rebuilding Ireland’s banking sector is a complex exercise that will take quite some time to complete.

The authorities are moving in the right direction but there is still a lot of work to do; the cornerstones of the restructuring process are well defined, but not all of them are agreed and certainly not all are implemented yet.

After all the aid has been spent and all the restructuring measures taken, we need banks that can price risk adequately.

And we also need an efficient market in which banks can finance the economy at competitive prices.

The government and the people of Ireland are tightening their belts, and I have nothing but admiration for their efforts and discipline.

I am confident that their efforts will pay off. I have no doubt that the Irish people have just begun to write yet another chapter in their long history of resilience and ingenuity.

Thank you.