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Speech given by Commissioner Jonathan Hill at European Central Bank Forum on banking supervision

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jonathan-hillSpeaking in Frankfurt on 4 November 2015.

'Bank Supervision: Europe in global context'

"I am delighted to be here on the first anniversary of the SSM. That gives me the ideal opportunity to congratulate Mme Nouy and her team for all that she and they have done in getting Europe's single supervisor off the ground in record time. So much so that it is easy to forget that this only a year ago that the SSM took over the supervision of some 6000 banks. The transition of supervisory tasks from national authorities has been remarkably smooth. Today, the SSM feels so much part of the furniture that it is impossible now to imagine life without it.

"One of the earliest tasks was of course to carry out the Comprehensive Assessment. It confirmed that our banks are more resilient and better capitalised. EU banks' ratios now stand at 12%, a similar level to the United States. And where shortcomings were identified, work was put in hand to plug the gaps. But I think the broader response to the Comprehensive Assessment also confirmed that people had confidence in the SSM's ability to do the job.

"At the same time, the SSM has been working to build a more consistent approach to supervision. This was always going to be a gradual process. But good progress is being made to harmonise Options and National discretions. You need to be able to compare apples with apples if you are going to be an effective supervisor.

"I am also delighted that the Single Resolution Board is up and running. Mrs König and her team are busy doing the spade work so that the second leg of the Banking Union - the Single Resolution Mechanism - can be fully operational next January. This will mean that if, despite the SSM’s strengthened supervision, a bank fails in the Banking Union, the SRB will be there to manage its orderly resolution. These are big steps forward, delivered in record time which have made our banking system stronger and protected European tax payers.

"But if we are to complete our regulatory framework, there is still work to do.

"First, all member states need to implement the Bank Recovery and Resolution Directive in full. This is an essential part of the Single Rule Book on which the Banking Union rests. A common backstop needs to be agreed for the Single Resolution Fund in case an emergency arises that exceeds the fund's capacity. More immediately, we need a bridge financing mechanism for the fund while it is being built up. And member states also need to transpose the Deposit Guarantee Scheme (DGS) Directive, guaranteeing up to €100,000 per depositor per bank.

"I will be keeping the pressure up on member states to live up to their commitments in these areas. And before the end of the year, the Commission will table a proposal for a European Deposit Insurance Scheme. In the original proposal for the Banking Union it was always intended that there would be a third leg – a mutualized deposit insurance scheme. So this is what you might call unfinished business. This new proposal will, however, be different from the previous one. It will be based initially on a reinsurance approach and will build on member states’ existing schemes. It will supplement national deposit guarantee schemes and provide funding when national schemes are unable to handle large local shocks. This will help break the link between banks and national governments, and reduce the risk of instability across the Banking Union.

"This November doesn't just see the SSM's first anniversary. It is also the first anniversary of President Juncker's Commission. How have we been getting on over the last year?

"We deliberately set about doing things differently. We have been working to legislate less and legislate better. In 2015, we only brought forward one fifth of the legislation that was typical in work programmes of an average year under the previous Commission. Frans Timmermans announced last week that next year we would introduce even less new legislation – demonstrating that this year wasn't a flash in the pan. And in my own area of financial services you can expect to see less new rule making and a period of greater stability.

"Everything we do is approached with the priority of jobs and growth in mind. So within months of coming into office we launched €315 billion plan to support investment. We've pressed ahead with free trade agreements, not just with America but also with Vietnam, Canada, Japan and New Zealand. And above all, we're pushing to unlock the single market's full potential. We have set out a clear plan for this and launched three single market projects: in energy, in the digital economy and in my own area of capital markets. Bigger markets, more competition and more trade are at the heart of our approach.

"The EU is now growing and recovering, with 27 out of 28 countries set to grow this year. That's good news, but we can't lose sight of the bigger picture.

"Global growth is forecast to be lower than in 2014. The EU is growing, but not fast enough. Just over 23 million people are out of work, one in five of whom is under 25. We have an ageing population with increasingly fewer people in work to support it. Growth in emerging and developing economies – important export markets - is expected to slow for the fifth year in a row.

"Given these challenges, I believe we have to work hard to get the balance right in the financial sector between managing risk and encouraging growth. How we reconcile micro with macro considerations is crucial. I very much agree with Mrs. Nouy that "micro-prudential supervision needs to be complemented by a macro-prudential perspective".

"We have written rules to make bank balance sheets more robust. Now it's important we focus on the big risks that might be missed at micro level. Given Europe's growth challenge, we need to make sure that our rules have not had any unintended consequences.

"A lesson of the crisis is that we had supervisors focused on narrow areas of financial activity. There was too little attention paid to how all these sectors were interlinked. Indeed, this is why we set up the European Systemic Risk Board: to focus on the collective behaviour of financial institutions; the potential knock-on effects between them; and how the financial sector can influence and be influenced by the wider economy.

"In good times we need the overview - the macro view – to lean against the wind, to question prevailing trends, and prevent the build-up of systemic risk. In more challenging economic times, like the ones we now face, the opposite is true.

"Everyone agrees financial stability is a prerequisite for sustainable growth. But it is also true that you cannot have financial stability on a sustainable basis without growth. The lack of strong growth is itself the biggest threat to long-term stability in the EU.

"So yes, we need to strike the right balance between managing risk and enabling investment. That does not mean weakening the framework, the architecture, that has made our financial system stronger and more resilient. What it does mean is that we should take a step back and look at our rules in the round to make sure that when you join up all the dots, that their combined effect does not impede growth.

"Seven years after the collapse of Lehman Brothers, I think it is therefore reasonable to ask whether our key assumptions about financial behaviour and economic growth have materialized. Did we expect the level of growth we're currently experiencing? Did we expect banks to withdraw from market making activity rather than re-price it?

"That's why I have launched a call for evidence that will run until the end of this year on the cumulative impact of rules in the financial services sector. Regulatory consistency, coherence and certainty are key factors for investor decision-making. If hard evidence shows there are unnecessary regulatory burdens that damage our ability to invest, if there are duplications and inconsistencies, we should be ready to change things.

"Separate from this exercise, we have already launched a review into the effect of the CRR.  I want to examine how these changes have affected banks’ ability to lend to businesses, infrastructure development, and other long-term investment projects. In particular, I would like know how all the recent changes have affected banks' ability to support local businesses.

"As you know, building on the work of the European Central Bank and with advice from the European Banking Authority,we are also working to relaunch European securitization markets as one of the early measures of the Capital Markets Union. We are doing this to help diversify funding sources, free up bank lending for the wider economy and increase the amount of credit available.

"This is not to encourage a return to the bad old ways which discredited securitization in the past. What we propose is a new framework to encourage the take-up of simple, transparent and standardized securitization. This will define a set of criteria and apply lower capital requirements when a securitization meets those criteria. By providing this clear definition of simple, transparent and standardized securitized products, we can support investor confidence and lighten administrative burdens. If we can rebuild the securitization market to pre-crisis levels, that would amount to an extra EUR 100 billion of investment for the economy.

"We are also looking to support the Juncker Investment Plan by making investment in infrastructure more attractive to institutional investors. We will create an asset class for infrastructure investment and lower capital requirements associated with it by 30%.

"These initiatives are just some of the first actions to build a Capital Markets Union. Put simply, CMU aims to connect savings to growth, and broaden the financing options that are available to European businesses so that they can grow and create jobs in Europe.

"A more diversified financial system will also help us to handle financial crises better in the future. An economy that is heavily dependent on bank funding – as Europe has traditionally been – will be hit hard if there is a contraction in that sector. That is of course exactly what we have seen in the EU in recent years. A well regulated Capital Markets Union will mean better cross-border risk sharing via capital markets. It will help diversify funding sources for financial market participants across all EU countries and increase financial stability in the EU as a whole. I have been very encouraged by the support I have had for it in all 28 member states and in the European Parliament – both for the short-term priorities and for the longer term ambition.

"Today is a good opportunity to look back and reflect on the progress that has been made with the Banking Union in the past year. But it is also a good opportunity to look forward and think about the challenges that remain. What further steps do we need to take to strengthen the Banking Union? How are the SSM and the ESRB working as we had hoped – and I will be reviewing the operation of both next year. Have we got the balance right between micro and macro prudential regulation? Do we have rules in place which support growth and financial stability? How can we build a Capital Markets Union that will increase funding for European businesses and help spread financial risk?

"Over the coming year, we have action planned in all these areas. We have strong foundations on which to build. My task now is to build a stronger and deeper single market for capital, to strengthen banking union, to build a more resilient banking sector to maintain financial stability and to support growth across the whole EU. I look forward to reporting back on our joint second anniversary next year."

EU

Will the Kremlin go beyond election interference? 

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Once the Kremlin is persuaded that Joe Biden will become the US’s next president, it may go for the jugular. Already today, not election manipulation, but triggering civil conflicts in the United States could be the main aim of Moscow’s mingling in American domestic affairs, write Pavlo Klimkin and Andreas Umland.

Over the past 15 years, the Kremlin has played with politicians and diplomats of, above all, Russia’s neighbors, but also with those of the West, a hare and hedgehog game, as known from a German fairy tale. In the Low Saxon fable’s well-known race, the hedgehog only runs a few steps, but at the end of the furrow he has placed his wife who looks very much like him. When the hare, certain of victory, storms in, the hedgehog's wife rises and calls out to him “I'm already here!” The hare cannot understand the defeat, conducts 73 further runs, and, in the 74th race, dies of exhaustion.

Ever since Russia’s anti-Western turn of 2005, governmental and non-governmental analysts across the globe have been busy discussing and predicting Moscow’s next offensive action. Yet, in most cases, when the world’s smart “hares” – politicians, experts, researchers, journalists et al. – arrived with more or less adequate reactions, the Russian “hedgehogs” had already long achieved their aims. Such was the case with Russia’s invasion of Georgia’s South Ossetia and Abkhazia in 2008, “little green men” on Ukraine’s Crimea in 2014, hackers inside Germany’s Bundestag in 2015, bombers over Syria since 2015, cyber-warriors in the US elections of 2016, or “chemical” assassins at England’s Salisbury in 2018.

Across the world, one can find hundreds of sensitive observers able to provide sharp comments on this or that vicious Russian action. For all the experience accumulated, such insights have, however, usually been provided only thereafter. So far, the Kremlin’s wheeler-dealers continue to surprise Western and non-Western policy makers and their think-tanks with novel forays, asymmetric attacks, unorthodox methods and shocking brutality. More often than not, Russian imaginativeness and ruthlessness become sufficiently appreciated only after a new “active measure,” hybrid operation or non-conformist intervention has been successfully completed.

Currently, many US observers – whether in national politics, public administration or social science – may be again preparing to fight the last war. Russian election interference and other influence operations are on everybody’s mind, across America. Yet, as Ukraine has bitterly learnt in 2014, the Kremlin only plays soft ball as long as it believes it has some chance to win. It remains relatively moderate as long as a possible loss will – from Moscow’s point of view – only be moderately unpleasant. Such was the case, during Russia’s interference into the 2016 presidential elections in the US.

The Ukrainian experience during the last six years suggests a far grimmer scenario. At some point during the Euromaidan Revolution, in either January or February 2014, Putin understood that he may be losing his grip on Ukraine. Moscow’s man in Kyiv, then still President of Ukraine Viktor Yanukovych (though very much assisted by Paul Manafort), may be kicked out by the Ukrainian people. As a result, Russia’s President drastically changed track already before the event.

The Kremlin’s medal awarded to the anonymous Russian soldiers who took part in the annexation of Crimea lists the date of 20 February 2014, as the start of the operation to occupy a part of Ukraine. On that day, pro-Russian Ukrainian President Yanukovych was still in power, and present in Kyiv. His flight from Ukraine’s capital one day later, and ousting, by the Ukrainian parliament, on 22 February 2014, had not yet been clearly predictable, on 20 February 2014. But the Kremlin had already switched from merely political warfare against Ukraine to preparing a real war – something then largely unimaginable for most observers. Something similar may be the case, in Moscow’s approach to the US today too.

To be sure, Russian troops will hardly land on American shores. Yet, that may not be necessary. The possibility of violent civil conflict in the United States is today, in any way, being discussed by serious analysts, against the background of enormous political polarization and emotional spikes within American society. As in Putin’s favorite sports of Judo – in which he holds a Black Belt! – a brief moment of disbalance of the enemy can be used productively, and may be sufficient to cause his fall. The United States may not, by itself, become ripe for civil conflict. Yet, an opportunity to push it a bit further is unlikely to be simply missed by industrious hybrid warfare specialists in Moscow. And the game that the Russian “hedgehogs” will be playing may be a different one than in the past, and not yet be fully comprehensible to the US’s “hares.”

Hillary Clinton was in 2016 a presidential candidate very much undesired, by Moscow, as America’s new president. Yet today, a democratic president is, after Russia’s 2016 hacking of the Democratic Party’s servers and vicious campaign against Clinton, a truly threatening prospect for the Kremlin. Moreover, Joe Biden was, under President Obama, responsible for the US’s policy towards Ukraine, knows as well as likes the country well, and is thus especially undesirable for Moscow.

Last but not least, Moscow may have had more contacts with Trump and his entourage than the American public is currently aware of. The Kremlin would, in such a case, even more dislike a Biden presidency, and a possible disclosure of its additional earlier interventions, in the US. The stakes are thus higher, for the Kremlin, in 2020 than in 2016. If Trump has no plausible chance to be elected for a second term, mere election interference may not be the issue any more. Moscow may already now implement more sinister plans than trying to help Trump. If Putin thinks that he cannot prevent Biden, the Kremlin will not miss a chance to get altogether rid of the US, as a relevant international actor.

Pavlo Klimkin was, among others, the Ukrainian Ambassador to Germany in 2012-2014 as well as minister of foreign affairs of Ukraine in 2014-2019. Andreas Umland is a researcher at the Ukrainian Institute for the Future in Kyiv and Swedish Institute of International Affairs in Stockholm.

All opinions expressed in the above article are those of the authors alone, and do not reflect any opinions on the part of EU Reporter.

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Defence

USEUCOM demonstrates readiness to support NATO in Exercise Austere Challenge

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US European Command (USEUCOM) leaders, strategists, planners and operators joined forces with their NATO counterparts in exercise Austere Challenge 2021 (AC21) to practice a co-ordinated response to a fictional major crisis this week. While the exercise was conducted virtually to protect the health of the participants and our communities from COVID-19 more than 4,000 military and civilian personnel participated.

The exercise brought together USEUCOM and its components who joined Joint Forces Command-Brunssum and Naval Striking and Support Forces NATO for the weeklong, computer-based, biannual command post exercise, which culminated today (23 October).

"We are looking forward to drawing on the lessons learned we have from this exercise as we prepare for future activities together," said German Gen. Jörg Vollmer, commander of Allied Joint Force Command Brunssum. AC21 is part of an exercise series planned and executed since the 1990s and focused upon training combatant command co-ordination, command and control and the integration of capabilities and functions across USEUCOM’s headquarters, its component commands, US interagency and NATO.

The exercise was linked globally to other US combatant command exercises, including US Strategic Command and US Space Command’s Exercise Global Lightning 2021 and US Transportation Command’s Turbo Challenge 2021. “Exercises like AC21 prepare the USEUCOM staff to respond to crises in a timely and well-coordinated manner with our NATO Allies, which ultimately supports regional stability and security,” said US Army Maj. Gen. John C. Boyd, USEUCOM’s director of training and exercises.

While the ongoing pandemic forced a variety of USEUCOM exercises to be modified or canceled this year, training and partnership-building has carried on. “We remain postured and ready to support NATO against any enemy or threat – be it a military crisis or an invisible virus,” Boyd added. “Together on innumerable instances, the US and NATO have demonstrated a strong, unbreakable working relationship to counter any threat to the alliance. AC21 is yet another example of the strength and solidarity of the NATO alliance and USEUCOM’s contributions to Europe’s collective defense.”

About USEUCOM

US European Command (USEUCOM) is responsible for US military operations across Europe, portions of Asia and the Middle East, the Arctic and Atlantic Ocean. USEUCOM is comprised of approximately 72,000 military and civilian personnel and works closely with NATO Allies and partners. The command is one of two US forward-deployed geographic combatant commands headquartered in Stuttgart, Germany. For more information about USEUCOM, click here.

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Brexit

President Sassoli to EU leaders: Help get the budget negotiations moving again

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President Sassoli with French President Macron and German Chancellor Merkel at the 15 October summit © KENZO TRIBOUILLARD / POOL / AFP 

In a speech at the EU summit on 15 October, Parliament President David Sassoli insisted it is now up to EU leaders to unlock the stalled negotiations on the 2021-2027 budget.

President Sassoli urged the EU heads of government to update the negotiating mandate they have given to the German Council presidency to make agreement on the EU long-term budget possible.

He noted that Parliament’s negotiators have asked for an additional €39 billion for key EU programmes that benefit Europeans and promote a sustainable recovery. “This is a paltry sum when set against an overall package worth €1.8 trillion, but one which would make an enormous difference to the citizens who will benefit from our common policies,” President Sassoli said, referring to the total amount of the seven-year budget and the Covid-19 recovery plan.

Sassoli noted that if Parliament’s compromise proposal is accepted by the Council, the budget spending ceiling will have to be raised by only €9 billion and this will bring the ceiling of those programmes to exactly the same level of spending as in the 2014-2020 period in real terms.

He said that the interest payments for the debt that the EU plans to issue to finance the recovery must be counted on top of the programme ceilings so as not to further squeeze the financing of these policies. The recovery plan “is an extraordinary commitment, and therefore the cost of the interest should be treated as an extraordinary expense as well. It should not come down to a choice between these costs and the [budget] programmes”.

The President also stressed the need for a binding timetable for the introduction of new types of budget revenue over the coming years and for flexible provisions in the budget to finance unforeseen future events.

Sassoli defended Parliament’s demand for ambitious emission reduction targets. “We must reduce greenhouse gas emissions by 60% by 2030. We need a target, which acts as a bright beacon on the path to climate neutrality. Protecting the environment means new jobs, more research, more social protection, more opportunities.”

“We should use the economic stimuli provided by public institutions to radically change our growth models while guaranteeing a fair transition that works for us and for future generations. No one should be left behind,” he added.

Commenting on the ongoing negotiations on future EU-UK relations, Sassoli expressed concern about the lack of clarity from the UK side. “I hope that our UK friends use the very narrow window of opportunity that remains to work constructively towards overcoming our differences,” he said, adding that the UK should honour its commitments and remove the controversial provisions in its internal market act.

Sassoli also called for a de-escalation of tensions with Turkey. “The Turkish rhetoric is growing increasingly aggressive and the country's intervention in the Nagorno-Karabakh conflict is certainly not helping matters. Now is the time for the EU to fully support German mediation efforts, to stand united and speak with one voice,” he said.

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