It is my pleasure to welcome you this morning – also on behalf of Commissioner Mairead McGuinness and European Central Bank (ECB) Vice-President Luis de Guindos.
This is an annual conference on financial integration, which has been held jointly by the Commission and the ECB since 2010.
And this long-running event is just another example of how the ECB and the Commission cooperate very well on issues of common interest.
This year’s conference will focus on the banking union and capital markets union – two policy initiatives at the core of our efforts to reshape the EU financial landscape. And both are highly topical in the context of the renewed debate on EU competitiveness.
We will have a panel on each of these two initiatives to discuss how to accelerate progress in a challenging economic and geopolitical context.
With this focus of the conference, we are honoured that Nadia Calviño, First Vice-President of the Government of Spain and Minister for the Economy and Digital Transformation will join us this morning for a fireside chat. We in the Commission know Nadia well and greatly appreciate her ongoing commitment to EU economic and financial integration.
We also look forward to hearing from Luis de Guindos and Mairead McGuinness, Commissioner for Financial Stability, Financial Services and capital markets union, both of whom will provide keynote speeches.
In addition, Guillaume Prache of Better Finance and Peter Praet, Fellow at the Solvay Brussels School Université Libre de Bruxelles will give a speech in the afternoon. I am sure their insights will provide further food for thought.
Other distinguished speakers will also join us in the panel discussions.
This conference is traditionally the occasion on which we launch our annual European Financial Stability and Integration Review (or EFSIR). And I will now briefly present the main contents of the report, before we continue with our agenda.
In my presentation, I will focus on three main topics
- the first topic is how the EU economy has evolved over the last year and the implications for stability and integration
- the second topic is developments in non-performing loans and related challenges
- and the third topic is new evidence on financial literacy levels in the EU and why financial literacy is relevant for our policymaking at the Commission
Let me start by reviewing the broader economic and geopolitical context of this year’s report – which covers 2022 and the first quarter of this year.
Over more than a decade, we have witnessed an extraordinary period of de facto zero interest rates, correspondingly benign financing conditions and relative global geopolitical stability. But these benign conditions have now ended – and ended abruptly.
2022 began with strong economic growth. The EU, and most of the world, had begun to emerge from the Covid crisis, so there was a degree of optimism in the air. Then came the Russian invasion of Ukraine in February.
The ensuing war resulted in natural gas supply disruptions, triggering a major energy-price shock and pushing inflation rates sharply higher. In response, the ECB and other central banks have swiftly tightened monetary policy to contain inflationary pressure. All of this has weighed significantly on economic confidence.
After a bright start, the EU economy experienced a significant economic slowdown in the second half of 2022. The outlook has improved in the first half of 2023, mainly due to falling energy prices – where the EU has acted with determination to boost supply and limit demand.
But there is a great of uncertainty in the wider economic environment today, which has been reflected in the financial sector.
Equity prices fell strongly during most of 2022, as investors became more risk averse. But market indices recovered from mid-October, due to lower energy prices and better-than-expected corporate earnings.
Bond yields increased significantly in 2022 and this increase abruptly ended the low-for-long interest rate era. The nominal EU benchmark yield, the 10-year German Bund yield, was at 2.6% by the end of 2022.
In early 2023, German Bund yields increased further and showed that high inflation remains in the system and markets and policy makers are expecting it to be more persistent that originally thought.
Financial stability risks also increased in 2022 and 2023.
Bank stocks significantly outperformed the wider market over much of the EFSIR review period. But this trend ended in March, when developments in the United States and Switzerland prompted investors to reassess risks in the banking sector more generally.
In principle, rising interest rates bolster the profitability of banks because rates on loans tend to rise faster than deposit rates. But tighter financing conditions are gradually weakening the financial soundness of parts of the private sector and sovereigns, with implications for asset quality on bank balance sheets.
In general, we believe EU banks are resilient. Our strong regulatory framework applies equally to all our banks and liquidity and capital levels are strong.
That is not say that there might not be valuable lessons to be learnt from events elsewhere in the world. We must remain vigilant, and the EU is actively participating in follow-up discussions at international level.
So, I am pleased that the speakers in our first panel today will discuss this in more detail and share their insights on recent developments in the global banking sector.
Another financial stability concern relates to sovereign debt sustainability.
Sovereign-debt concerns have so far remained in check due to policy actions and the benign impact of inflation on debt-to-GDP ratios. The EU’s aggregate government debt-to-GDP ratio declined in the last quarters of 2022. However, this trend cannot be assumed to continue in the medium term.
Elsewhere, financial market developments can be viewed as warning signs. The yield curves of the major currencies are inverted; banks have tightened credit standards significantly; and the amount of net lending of euro-area banks is very subdued. So, as usual, “no room for complacency”.
And what about financial integration?
Past crises have taught us that financial integration with a proper and well-balanced regulatory framework is the best way to achieve robust economic growth and development. And this is even more relevant in the current geopolitical context.
This year we celebrate the 30th anniversary of the Single Market. And an integrated financial-services market is one important pillar of the Single Market.
The analysis in the EFSIR shows that financial integration has progressed, when viewed from a medium-term perspective. But adverse economic conditions have led to a reversal of the positive trend in integration indicators in the more recent period.
Most indicators of integration declined during 2022. But let’s not lose sight of the overall picture. These indicators remain around the levels of 2019-2020, prior to the COVID-19 pandemic.
Nevertheless, we must continue our efforts to further advance financial integration. In particular, we need to continue to make progress on the CMU and the banking union – and we will discuss these topics further during the day.
I will now say a few words on the special chapters of the EFSIR report.
Given the current economic uncertainty and risks, it is important that banks can deal with any increase in non-performing loans (NPLs).
The first special focus chapter in EFSIR takes a closer look at how NPLs have developed in the EU and the policy measures that have been taken.
Over the past years, banks and policymakers, at national and EU level, have made commendable efforts to tackle NPLs and reduce the outstanding stocks.
These efforts have resulted in an encouraging reduction in NPL levels across the EU, as shown in the chart.
The average NPL ratio is at its lowest level since the global financial crisis, standing at 1.8% in the third quarter of 2022. In addition, banks have also gradually built-up provisions for NPL books.
That being said, concerns about bank asset quality re-emerged due to the possible impact of the COVID-19 pandemic. The consequences of Russia’s invasion of Ukraine, the disruptions in trade and the subsequent unexpected surge in inflation have added to these concerns.
Going forward, tighter macroeconomic and financial conditions will weigh on economic sectors, albeit with a lag, and the existing vulnerabilities of more indebted companies and households are more likely to surface.
This also creates a challenging environment for the financial sector – and the banking sector, in particular.
On a more positive note, the analysis in the EFSIR highlights some bright spots in this context.
The EU banking sector is more able than before to tackle a possible deterioration in asset quality and a potential increase in NPLs. The sector has so far demonstrated its resilience, and banks have improved their levels of capital and liquidity in order to face headwinds.
In addition, the regulatory and supervisory framework has been enhanced, particularly due to
- the prudential backstop regulation
- the strengthening of bank supervision
- the flanking measures to improve conditions in the areas of
- NPL secondary markets
- insolvency, in and out-of-court debt restructuring and collateral recovery
In conclusion, the EU banking sector managed to weather the COVID-19 crisis and its economic fallout well. EU banks appear to be resilient and ready to tackle a possible rise in NPLs. Nevertheless, we need to remain diligent, exercise caution, and take preventive measures to mitigate the impact of any potential inflow of new NPLs.
Turning now to financial literacy – the topic covered in the second special chapter of the EFSIR.
The financial environment is not only challenging for financial and non-financial corporates other companies, but also for retail consumers of financial services.
For many of these retail consumers, taking financial decisions that are in their best interest is not straightforward. The increasing complexity of the financial system and ongoing innovation and digitalisation make it even harder for some to navigate the financial landscape.
In the EFSIR, we present new evidence on how EU citizens perceive their financial competence and ability to take financial decisions. This also links to our recently proposed Retail Investment Strategy.
Until recently, we have not had representative data from all our Member States to monitor financial literacy and we have not always been able to incorporate empirical findings in our policymaking. This is why we conducted a recent Eurobarometer survey on financial literacy of over 26 000 EU citizens in all Member States.
Overall, financial literacy is found to be rather low, even if there is a significant difference between Member States. About a fifth of the EU population (18%) obtain a low score on financial literacy and are likely to experience difficulties in taking certain financial decisions. In addition, only a fifth (18%) have a high financial literacy score in the survey.
Financial knowledge in certain domains is largely absent. For example, less than half of the surveyed population was able to answer a question on compound interest correctly. This is a concern, given the relevance of this concept for people’s attitudes towards saving and meeting long-term financial goals.
The survey not only revealed differences between Member States, but also between groups. For instance, young people, women, individuals with a lower level of education or income show lower financial literacy levels, and they are found to be less resilient to an income shock.
The Commission has therefore identified financial literacy as one of our priorities.
Research shows that higher levels of financial literacy are associated with better debt management and saving behaviour. For instance, persons with higher levels of financial literacy tend to have lower debt servicing costs and are less likely to fall into arrears. In addition, they participate more in financial markets and are better at grasping the benefits of diversification.
These positive behaviours mean that financial literacy can contribute to our core policy objectives, such as safeguarding financial stability, increasing the efficiency of the financial system, and improving the functioning of financial markets.
People, who are financially literate, typically experience fewer problems with over-indebtedness and arrears. So, financial literacy can limit the amount of non-performing consumer loans. People with higher levels of financial literacy are also expected to exert more scrutiny on the financial industry.
The Commission has taken other measures in the past to foster literacy
- we developed a joint EU/OECD financial competence framework for adults, and are now working to develop a similar framework for youth and children
- We have taken targeted measures support the financial education of consumers in relation to responsible borrowing and debt management
- The Commission has also funded financial literacy projects of Member States via, for instance, the Technical Support Instrument, which this year includes a Digital Financial Literacy flagship project
It is indeed important that EU Member States develop their own initiatives at national level to promote financial literacy. The Commission will support these measures to enhance financial literacy and share best practices.
But financial education is a Member States’ competence, so a coordinated effort is needed at both EU and national level, as well as by public and private stakeholders.
Raising financial literacy is important to empower consumers to take financial decisions in their best interest and contribute to core objectives in financial services policy.
But it is not a panacea.
That is why we have the Retail Investment Strategy, which was adopted on 24 May and places the consumers’ interests at the centre of retail investing.
In line with what I have just said, this strategy aims to empower retail investors through financial literacy and other measures to make investment decisions that are aligned with their needs and preferences. At the same time, it aims to ensure that they are treated fairly by financial intermediaries and receive suitable advice.
The strategy is ambitious and includes wide-ranging measures, including measures to address conflicts of interest and to improve the information and marketing that investors receive. The additional measures on financial literacy are complementary to those.
All this, and more, you can find in this year’s EFSIR which I invite you all to read. You can find it on the DG FISMA’s website.
In conclusion, we have clearly come a long way.
When we issued our first EFSIR, there was no banking union or capital markets union. We were just emerging from the global financial crisis and the related euro crisis was just ahead of us.
We overcame both. And we did so by focusing on financial integration and financial stability, that are also central to the EFSIR and today’s conference.
But just as these crises have faded from memory, momentum behind the financial integration process has stalled. In consequence, the EU risks falling behind in a global economy characterized by massive transition – green, digital and geopolitical.
We cannot simply wait for another crisis to restore the necessary momentum behind the financial integration process. Rapid progress in banking union and CMU is urgent and requires ongoing policy efforts.
To that end, I am looking forward to the discussions and speeches that we will have on this today.
European Financial Integration conference 2023
European Financial Stability and Integration Review reports