How the EU reshapes

the Belgian financial sectorFilip Dierckx, chairman of Febelfin &

Michel Vermaerke, CEO of Febelfin

AGENDA

Febelfin | 26/6/2012 2

Introduction• The Unholy Trinity: changes on all ends

• EU today at a crossroads

Main subjects of today• Banking Union

• Eurobonds

• Fiscal Union

• Liikanen, Volcker & Vickers

• Basel III – CRD IV

• Shadow Banking

• Consumer protection

Conclusion

Introduction

3

• The Unholy Trinity: changes on all ends

• EU today at a crossroads

Febelfin | 26/6/2012

European

Government Crisis

Financial

crisis

Economic

crisis

The Unholy Trinity: changes on all ends

GrowthBank

stability

Debt

reduction

Febelfin | 26/6/2012 4

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)

01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Belgium

Italy

Spain

Portugal

France

Ireland

Greece

Eurozone crisis – historical perspective

• Maastricht Treaty + Stability & Growth Pact

• Sovereign debt max 60% of GDP

• Max 3% budgetary deficit

• No actual enforcement measures in place

• Created a factual Eurobonds environment

• Provided access to (too) cheap money for member states

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)Febelfin | 26/6/2012 5

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)

01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Belgium

Italy

Spain

Portugal

France

Ireland

Greece

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)

Eurozone crisis – track record & result

55

60

65

70

75

80

85

90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Germany

-9

-6

-3

0

3

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

The 3% max budget deficit

covenant was quickly

breached

(incl. Germany = precedent)

60% to GDP norm was never

reached as there was no

incentive

EA-17 general government gross debt (%GDP)

EA-17 general government deficit/surplus (%GDP)

Debt

reduction

Febelfin | 26/6/2012 6

7

Eurozone crisis –

sovereign debt evolution & outlook2008-2011 Sovereign debt evolution and 2012-2013 forecast (%GDP)

EA

BE

DE FR

IT

ES

PT

IE

GR

40

60

80

100

120

140

160

180

Debt

reduction

Source: European Commission 7Febelfin | 26/6/2012

• Increase of the systemic risk of the banking sector

• Banks are an important buyer of government debt paper

• …

Febelfin | 26/6/2012

Bank

stabilitySystemic risk

8

Banks in the eye of the storm:

the broader picture

• Observations

9

Bank run

Nationalisation of banks

Locally financed debt

National solutions

Cheap liquidities (LTRO)

Against EU spirit

Basic belief: the functioning of banks is based on trust

today no trust and more importantly no LT plan to rebuild trust

Bank

stability

Febelfin | 26/6/2012

Belgium takes the lead in ‘deleveraging’ –

transformation ongoing

Total liabilities of

Belgian banking sector

(in billions of EUR)

Total equity capital of Belgian

banking sector(in billions of

EUR)

Leverage (in units)

End of June 2007

1,595.2 48.5 31.9

End of Dec. 2011

1,147.3 52.8 20.7

% change -28.1% +8.9% -35.1%

Source: Febelfin calculations based on NBB data (consolidated basis)

Belgium is a quick learner when

it comes to deleveraging

Source: ECB

10

Bank

stability

Size of MFI's as % of GDP

200

250

300

350

400

450

98 99 00 01 02 03 04 05 06 07 08 09 10 11

EMU BE

FR DE

Size of MFIs (%GDP)

Febelfin | 26/6/2012 10

Impact on world GDP growthGrowth

EU economy is missing the lubricant of trust and confidence

Source:European Commission

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

BE DE FR IT ES PT IE GR

GDP growth 2008-2013 forecast (in %)

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2008 2009 2010 2011 2012 2013

World

EA

Febelfin | 26/6/2012 11

EU today at a crossroads

12

Ad hoc solutions• Spanish problem

left in Spain

• Further increase of

Spanish deficit

• Senior vs junior

debt holders

….

Long term solutions• Banking union

• Eurobonds

• Fiscal union

…

Basel III – CRD IV• Middle of important changes

Crucial role of banks• Financed economy during economic

growth (until 2007) & crisis (2008- Q1

2012)

Banks directly impacted by any decision Febelfin | 26/6/2012

Main subjects of today

13

•Banking Union

•Eurobonds

•Fiscal Union

•Liikanen, Volcker & Vickers

•Basel III – CRD IV

•Shadow Banking

•Consumer protection

Febelfin | 26/6/2012

I.Banking Union : concept

14

One single cross-border supervisory

One EU-wide Deposit Guarantee Scheme

One resolution fund

Febelfin | 26/6/2012

Banking Union: general considerations

• General considerations

• No possibility for national discretion on capital requirements

• Direct recapitalization to avoid additional sovereign debt

• Strong & deep political and fiscal union required to mitigate the moral hazard risk

15

Break the vicious spiral between

sovereigns & banks

Febelfin | 26/6/2012

Banking Union: sector considerations

• Banking Union could be an answer

• To avoid regulatory competition & inconsistencies

• For effective crisis management of cross-border SIFI’s

•BUT

• Balance needed between EU-wide financial stability measures and proportionality

EU Level Playing Field

• Common DGS should take into account previous & current national DGS contributions

Profitablity

16Febelfin | 26/6/2012

Belgium: evolution DGS

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bp)

01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Belgium

Italy

Spain

Portugal

France

Ireland

Greece

10Y Government Bonds: Interest rate spread with German Bund 10Y (in bps)

II. Eurobonds: considerations

• Possible need for formal Eurobonds

• To lighten the interest rate burden of certain member

states

• To break the vicious spiral between banks & sovereigns

• To fund a Banking Union resolution scheme

• Eurobonds could limit the incentive for structural changes

• Eurobonds in themselves could create moral hazard

• A strong & deep political and fiscal union is required to

mitigate the moral hazard risk

17Febelfin | 26/6/2012

III. Fiscal Union: context

• Cornerstone of the eurosystem (Stability & Growth Pact, Semester and

Sixpack)

• Becomes even more acute with Banking Union

• Key in avoiding moral hazard and promoting eurozone economic

convergence as was envisioned with the Stability & Growth Pact

Moralhazard

Fiscal Union

Ensure a fiscally sound EMU & mitigate the moral hazard risk Febelfin | 26/6/2012 18

Fiscal Union: considerations

• Considerable sovereignty transfer needed

• On the short term, common borrowing on the bond market would be

required to create fiscal breathing room for currently struggling

member states

• The banking sector is indirectly suffering from the lack of confidence

in the market vis-à-vis the eurozone and member states’ outstanding

debt

19

Stabilize the market to restore confidence

Febelfin | 26/6/2012

IV. Ringfencing initiatives

Volcker vs. Vickers

20Febelfin | 26/6/2012

Issue Volcker rule Vickers Report

Separation/segregation Commercial banking and

some investment banking

Ringfence retail banking from

wholesale and investment

banking

Prohibitions Banks cannot engage in

proprietary trading and

covered funds (exemptions)

Activities that must be

offered/that are permitted

within ringfence

Scope of applications All banks benefiting from

federal insurance of deposits

All UK banks

Extraterritoriality Applicable also to non-US

banks if US criteria matched

No (only UK entities)

• European Commission appointed a High-Level Expert Group (Liikanen group)

to discuss on possible reforms to the structure of the EU banking sector

• Mandate of Liikanen Group:

• A final report of the Liikanen Group is expected in September 2012

The Group has been requested to consider in-depth whether there is a need for reforms directly

targeted at the structure of individual banks themselves and the banking system as a whole, in

order to reduce the probability and impact of failure, better ensure the continuation of vital economic

functions and better protect retail clients, and to make any relevant proposals as appropriate.

The Group will have regard to on-going regulatory reform both, in the EU and globally, and will assess the

added value of structural reform. The group will pay particular attention to on-going structural

reforms, i.e. regarding activity restrictions (Volcker Rule), size limits (Dodd-Frank Act) and/or

structural separation of certain activities (Vickers Report).

Ringfencing initiatives

Liikanen

Febelfin | 26/6/2012 21

Ringfencing initiatives

Sector considerations

Universal banks are an asset for the European economy. Ringfencing would make dissappear the advantages the universalbanking model presents for banks, shareholders and the wholeeconomy, but can’t prevent financial crises resulting from market activities

Financial sector not in favour of structural reforms (Vickers), as current ongoing regulatory reforms, including the developmentof a crisis management framework, are sufficient to reach the objectives

22Febelfin | 26/6/2012

V. Basel III – CRD IV

2017

Important characteristic Timing

Capital Stronger than in Basel II

2013

Leverage Reduce the size of activities 2018

Liquidity Survive 30 days 2015

Funding Certain funding > 1 year 2018

Febelfin | 26/6/2012 23

VI. Shadow Banking: context

No clear definition (even after 2y of discussion)

Size, reach, utility unknown

Shadow banking investigated on different levels

- EU Commission (Green paper)- Regulatory proposals Financial Stability Board (G20)

24

• Current (re-)drafting of regulatory requirements in banking, could lead tot a

growing shadow banking sector

Shadow banking will prove to be very elusive to regulate

(absence of a clear definition poses a risk of inappropriate regulation)

Febelfin | 26/6/2012

Shadow Banking: considerations

• Micro-managing the banking sector through stringent regulations on a global,

European and national level, could push financing activities into the ‘unknown’

• Effectively regulating the elusive shadow banking sector will prove to be

• Extremely difficult

• Sometimes inappropriate, as particular regulatory measures are already in

place (e.g.: UCITS for Exchange Traded and Money Market Funds)

Avoid overregulation on banks, to keep & manage the risk in plain sight

Febelfin | 26/6/2012 25

(source: Oliver Wyman)

VII. Consumer protection

EU measures

• MiFID II

• SEPA

• European mortgage directive

Belgian initiatives

• Moratorium

• Savings account

Febelfin | 26/6/2012 26

Conclusion

27Febelfin | 26/6/2012

Towards a new financial model through

dynamic and balanced regulation

Clear and stable regulation, via cumulative impact assessments

Preserve integrated EU financial market through maximum harmonisation at the European level

More coherent and consistent (implementation of) regulation

Respecting phasing-in

Sustain diversity through proportionality

Press Conference | 20 June 2012 28Febelfin | 26/6/2012 28

? Q&A

29Febelfin | 26/6/2012

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