 Unedwag i'r rhysbudd yw'r rhysbudd, a dyma hefyd yn ystod, ac yn eto y rhysbudd o'r rhysbudd. Felly mae'r rhysbudd eich fawr yn ni wedi gael bwysig hwnnw i gydigol bydd yng ngywethaf ymargrifesau yw'r rhysbudd, ac yn ystod yn ystod y lle yw yw'r rhysbudd fod eu buld wedi'n gwlad cyfreithio beliau i brolygedol. iawn y cyfrifion gyda 700 bilion bwysig o bwysig. So dyna'r first thing that changed in Europe. The EU response in terms of governance is also quite extensive. There's a reformed stability and growth pact known as the six pack. There's a European semester. Our budgets recently went through it for the first time. It remains to be seen how effective it will be, but it's certainly a tightening up. ac mae'r cwmhredu ychydig y gwybod, mae'r cyflawn yn octobr, ac yn dderbynedd. Rwy'n meddwl i'r cyflawn. Mae'r newydd ymarfer yw'r proses yw'r cyfrifadegau, sy'n meddwl i'r cyfrifadeg, felly mae'r cyfrifadeg cymryd arall y cyfrifadeg, dyn nhw'n atddangos cyfrifadeg a gweld gan y cyfrifadeg, a ychydig yn y cyfrifadeg. Mae'r cyfrifadeg hefyd yn ddech chi'n meddwl i'r cyfrifadeg yw'r cyfrifadeg, ddod yn ychydig yn ymweld i'w cyfrifau i'r prifsgwrddau a ddiddorol i'n fynd, byddai'n yn ysgol i'r ffrif. Roedd yma yn ymgyrch yn gallu'n meddwl syniadau sy'n mynd i'w gweld i'r blygu gyda ni'n rhai amser yn y cyfrifau sy'n mynd i'r blygu, ac yn ymweld i'r blygu'n mynd i'w helyw. Wel, yna'r ffordd iawn, ychydig yn ymgyrchu a'r meccan yn ysgol i'r bwyr. ac yn fwy hwnnw i'r cyfrifyn cyllidol, bydd ymateb yn fawr, ac mae'n meddwl i'n fawr, mae'n fawr yn ymddydd i'r prosesu, i'r cyfrifynu, ymddydd a'r ddechrau, ac yn ymddydd, yn ymddydd y ddechrau, fe yw'r 20 ymddog ar gyfer 60% gyda'r GDP. Roedd, mae'n credu ymddydd, mae'n annan iawn, i gyfrifynu'r drwg, yn y cyfrifynu yma, mae'n cyfrifynu'r gael. They did snatch interests rates to zero, which never happened before, and not alone with that, they increased their balance sheets dramatically by providing funds and liquidity to the banking system, and in some countries by purchasing government debt. That wasn't on in Europe, given the legal limitations of the ECB, but they did find their own way of dealing with it in the form of OMT, which is outright monetary transactions, a programme announced in mid 2012 by Mario Draghi, Felly, mae'n cael ei ddweudol o bwysigfyrdd, o'r cyflwynt o'r un o'r rhan o'r rhan. Felly, mae'n cael ei ddweudol o'r cyflwynt. Felly, mae'n cael ei ddweudol i amgylcheddoedd cyfieithiau yn bwysigfyrdd. Ond, mae'n cael ei ddweudol o'r ffasgwrdd, bwrw, fel bod yn ymwyllgor ffasgwrdd, rwy'n ysgrifennu. Felly, mae'n cael ei ddweudol i'w ffasgwrdd ddechrau. Ond, mae'n cwrwc yn ysgrifennu ysgrifennu is the answer to getting rid of fiscal fragmentation or at least mitigating it and severing the link, which was referred to a couple of times already, between that link between governments and banks and more on that and on. Now, fragmentation is multifaceted. I suppose the first slide here shows the withdrawal of core banks from advancing credit to periphery countries and the periphery countries are shown there, you can see them in different colours. Ireland is not green, unfortunately, I didn't do this graph. Ireland is in red, it's the one towards the bottom. There are two things I would suggest to note on this. Well, first is the scale of the increase up the mountain and there's the scale of the decrease. In total, their exposure to the periphery has fallen from 1.6 trillion to just under 800 billion. If you look very closely at the red block, which is Ireland, however, you'll find that it has reduced not by half, but by two thirds. And Italy did reasonably well, Italy's the green one, there's still a fair old exposure to Italy. So that's the first one. Here we have credit in as many forms. There is a shortage in the periphery of credit, both in absolute terms and also the cost of it is greater than elsewhere. This is the quantity here and there are two things from this slide. Well, the green line here, I did do this chart so you can see Ireland in green. The green line here is Ireland and you can note the reduction in the quantum of credit is greater and earlier than most of the other peripheral problem countries. In fact, it was quite extreme. This is a broad private sector credit. You will see that in the meantime we've been joined by countries like Spain and Portugal who are now experiencing rates of contraction in credit, which are greater than Ireland. But the contrast that with the core, which in this case is represented by Germany and France, where you will see that credit is more or less unchanged to slightly positive. And that's one of the issues, that's one of the problems of fragmentation which is hoped Banking Union will do something about. The other one is the rate paid. This is loans up to one million, new loans up to one million, typical of what an SME, a small company would borrow. And you can see here again, these are spreads over Germany. It's the percentage difference to Germany. Indeed, if you look back, Ireland at one stage was borrowing rates were slightly lower than Germany. Now they're a good bit higher. There are three camps here. Portugal, via Constantio's country, fares the worst. It's paying more than 3% above Germany. Then we have a group in the middle with Ireland and Italy paying roughly one half percent more. And finally, you'll see that France has done rather well. They're not paying anything extra. They're getting the same deal as Germany. I quote it very quickly here. House purchase loans. Similar story, although the spreads are not as big. We're paying, you know, between half and 1% more for our new house loans and mortgages than Germans are. Here at the Bonneas, this is another manifestation of the crisis. It's been a big change. Before EMU, there were spreads that cost the funds to government in countries as compared with Germany. And again, this is the percentage over Bonnes was higher. And EMU was all about reducing those spreads. Then we had the collapse of spreads to virtually zero. And now you have the crisis. And you can see what has transpired. Just take Ireland for a moment. The spread over Bonnes hit 10%. They're now down to one and three quarters approximately. And that is the correction to which Minister Newnan referred to. But they're still there. And what question over Banking Union is, will it eliminate those spreads or not? Most of us think that risk will be priced differently in the future and that the cost of borrowing to government in the periphery will be higher than in Germany for the foreseeable future. I'm not going to dwell with this. This is the pernicious triangle which Minister Newnan referred to earlier. And if you want to ask questions, don't you can in the Q&A. So what's happening? I mentioned Basel too. Basel is where the rules on bank capital are set. And then they're implemented across the world by the various administrations. Two things to note here. The quality of capital has been improved because there was a fair bit of, I wouldn't like to call it rubbish, but there was very poor capital on banks balance sheets which was being counted as capital. And the quantity has changed. One of the figures for Europe, for example, is that since, in recent years, since the stress test started, about 225 billion of extra capital has been raised by banks. It does put the European ratios on a par with the United States. We're as good on average. We don't get the credit for that. Why? Well, there are still some gaps. And you'll probably hear Alan Duke talk about that in a moment. Not every bank has the full capital ratios, but a lot has been done. There are other things such as leverage races and liquidity races as well. To come to banking union proper, most people think it has three components, and it's sitting on a fort. The three components, as has been mentioned already, are the single supervisory mechanism, affectionately known as the SSM, the single resolution mechanism, the SRM, and the green block here, which is deposit guarantees, which is a slightly more controversial and hasn't been mentioned yet today as far as I can recall. Certainly Mr Constancio didn't mention it. And there was a feeling at one stage that you needed a common deposit mechanism. Common deposit insurance would have backed up at Europe to complement the other two. But that part of the proceedings has been dropped. And we'll come back to that later on as to what is going to be substituted for it. But in essence it involves the national governments will backstop their deposit guarantees in the way that the Irish one does at the moment. And finally underneath those three is the single rule book which predates the banking union. And it's basically a harmonisation of the rules, governing bank supervision, governing definitions of capital, et cetera, et cetera. Now I want to mention here that one of the issues which we will come back to again and again today is the gaps in banking union. Because for Ireland we came to the conclusion early on in this group that the fuller the banking union the better it was for Ireland. The greater the chance of reducing the fragmentation I showed you a moment ago, the better the chance of leaving the cost of credit for banks on an equal footing as the minister Newton said, and the better the chance then the borrower of equal credit would experience equal access and interest rates on credit. So to the extent that there are gaps left in banking union this may not be achieved. So it is important that fragmentation be rolled back and eradicated. And the single rule book is a key way in which those gaps are being eliminated. Not perfectly as we'll see later, but certainly a lot of progress is being made there. And that's under the auspices of the EBA to just have another acronym. That's the European Banking Authority, a new body which was set up in 2011 as an early response to the crisis. Now what is the single supervision mechanism? Well at the risk of repeating what others said it's basically the elevation of supervision from the national supervisors to the centre, to the European central bank. This happened because there was a provision in the treaty which allowed that happen. Otherwise a new treaty amendment would have been required. It's perhaps unfortunate that the ECB is not the ideal place for it. A new body separate like the EBA would have been better, but there are certain conflicts within the ECB and a complicated structure has been evolved to get over them. In principle it covers all credit institutions in the euro area. That's 4,400 not 6,100 as you said. But the ECB will directly supervise only well 128 according to its latest document, which is however 85% of the assets of the banks in question. And a bank is deemed to be significant if it meets the following criteria. Its assets exceed 30 billion, its assets exceed 20% of GDP and 5 billion to rule out the smaller ones. It's deemed to be significant either by the national supervisors or by the ECB in a cross border context. It has requested or received aid from one of the bailout funds such as the ESM, the European Stability Mechanism or the EFSF, which we got money from. We didn't get anything from the ESM, but we got money from the EFSF. And the other 4,300 banks will be supervised by the national supervisors but under the control of the ECB, which has formal legal responsibility. And that's an important distinction. Now the supervisors, I should say a word for them, God bless them. They are a big part of the problems that arose in Europe because they didn't supervise their charges rigorously. And when the crisis broke, instead of cooperating, which was envisaged under the mechanisms that then existed, they circled the national wagons and as was said earlier, looked after their own banks, which added greatly to fragmentation and caused many rifts in Europe. We only have to think of the resolution of, say, DEXIA, one of those banks which had branches in multiple... There was no mechanism for doing that and all the old nationalisms came into play. A brief word on the complicated mechanisms. The single supervisory board is part of the ECB. I'm not going to go into it in detail. But the governing council has the ultimate say because it is in the treaty is the deciding body. But there is a complicated accept-reject procedure to get over that. Banking union, to get to the meat of the matter, I think it has short and longer-term implications. And in some ways the shorter-term ones might be as important or perhaps even more important than the longer-term ones. And that's because the ECB... We had stress tests run by the EBA, the European Banking Authority. They were not a good experience because banks which had been stress tested, including banks in Ireland, failed shortly after they were tested. So you have to say why was that. Didn't get the correct information from the national supervisors? Were the EBA incompetent? No. The EBA is quite positive actually and there's a major assessment going on at the moment. So the history is bad, therefore the ECB are determined to take over the banks with a clean bill of health. To this end they're going to test them comprehensively over 2014. And indeed Ireland is ahead of the game here. Our tests have already begun and the first results were announced actually overnight. Now the tests that we'll have, there will be three parts. A supervisory risk assessment, an asset quality review and stress tests as we know them by the ECB and the EBA. Now I've said that the history is bad so the ECB is basically going to clean up the stable and the question arises what will the fallout from that be and how will it be dealt with. And I could spend a lot of time dealing with that but I'm going to leave it for the moment because there'll be a panel discussion in the moment in which we'll be able to go into that in greater detail. To move on to the second element of Banking Union. This is the single resolution mechanism or SRM. Again it's complicated. It was difficult to find the legal basis in the treaty is interesting and you will have an expert here to discuss that with you in a moment. But this is what the result broadly looks like. A new single resolution board to be established. This is sort of an advisory body in Europe. It will interact with the Commission which will have a reinforced role here and it will also have a single bank resolution fund funded by levies on the banks as you heard earlier up to 1% of covered deposits and building up that fund building up to 55 billion over a period of 10 to 14 years. Now the key here is the role of the European Commission because the European Commission the board will make recommendations but the European Commission will decide. In other words, if a bank is in need of resolution if it needs extra capital if it is in danger of failing if that fail would have systemic implications Europe wide and we know that even a small bank like Dero Langlow Irish can have a systemic implications it doesn't have to be a big bank to do that then this procedure will come into play and the recommendation will be made to the Commission which will take the decision and I'll come back to that in a moment. Meanwhile on this fund I've probably said as much about it as I want to at the moment how would the SRM work? The ECB would notify the Commission, the board and the national resolution authorities that a bank was in distress. The single resolution board will then assess if it's a systemic threat and that there's no adequate private sector solution private sector solution will involve raising money from various private sector sources which could be shareholders or it could be additional bonds etc. If so then the board will recommend the Commission to trigger resolution as I've said so that's a key new role for the Commission that is not without controversy. Some countries don't like think the Commission is getting too big for its boots they don't like the idea of the Commission for example it's often said no one's going to terminate Paribas or the only one to terminate Paribas would be a Frenchman. So the idea of having someone in Brussels say that your cherished bank needs to be resolved is not attractive in some courses especially in Germany it should be said. So there is some debate still over that and it's not clear that the Commission will end up being the deciding authority. There's a proposal that it could be closer to the Council which I believe to be legally feasible and possibly involving the national competent authorities that is the National Supervisors. This would be far from ideal from our point of view in that it would mean that banking union would be less full as I said earlier and the chances of fragmentation continuing would be much greater. But that anyway is the proposal at the moment. A very quick slide on the implications of resolution you can see basically what it does to banks is it shrinks them and you can see where the shrinkage occurs it's mainly in the banks investments which in a crisis situation get depleted and diminished and on the other side of the balance sheet new equity has to be found so debt that is bond holders and we heard a lot about junior bond holders here in Ireland during the crisis their debt will now be converted into equity so the bond bit of it will diminish and of course people who thought they were just lending money to a bank and returned for a very good interest rate could end up owning share capital shares in something with perhaps a rather dubious value on the shares so that's the issue. I mentioned the single rule book it is supporting all of these three blocks above it the three blocks being the supervision being the resolution and being the deposit insurance and they're working away on that the aim is the level playing field but mitigate arbitrage opportunities etc etc now there are gaps in the single rule book and I want to mention them in a second but first the timeline from here on out there's a lot still to be done as Minister Noonan said I won't spend much time on this other than to note the legal framework now the SSM it's down there as autumn it's now likely to be November early November when the ECB will take over between then and 2018 things will be controlled we also have the resolution mechanism coming into place with a directive under it which I haven't talked about which is the BRRD the bank resolution and recovery directive it's part of the whole thing you will have a complicated bail-in structure over that period and that's the transitional one if you like because there are very specific rules under the BRRD which will come into force as planned in 2018 1 January and they will allow for bail-in not just of junior bond holders and in certain instances depositors but that is not scheduled to happen until 2018 in the meantime the state aid rules will apply and they now allow for bail-in of junior bond holders and shareholders of course as has already happened in Ireland and indeed in many other countries so that is the regime in the interim and the state aid rules will continue to apply now bail-in good and all as it is and it will provide a lot of money in the future and it may deal with most or nearly all of the crisis that arise it might not be enough if you had a systemic crisis that we've had recently that I would add is a once in a century crisis but in that case you might need a backstop and where would that backstop come from that backstop would have to come from Europe and it would be from the ESM the European stability mechanism and already 60 billion has been earmarked for this purpose but there is some controversy over that and it's still under debate but that's all I want to say about the timeline I want to finish up now with the long term implications and I suppose the way to summarize this is to say that banking union it's a necessary but not a sufficient condition for the single market in other words it's a critical step on the road to getting the market back on the road to reducing fragmentation but it may not be enough in itself sovereign bond yields for example it's unlikely that the differences or spreads will go back to zero over bonds so there will be a gap there and the single market there's a problem the single market applies to 28 countries banking union will have the Eurozone which is 18 from next January plus ones who opt in voluntarily say maybe another 5 or 6 in other words it won't be the full 28 so there's a a schism between the SSM countries and the total EU with the EBA responsible for the whole lot in a sense but there's a risk of further fragmentation between the ins and the outs and that of course is bad for the single market I said it come back to the gaps in the directives and there are gaps the national supervisors and regulators are fighting a determined rearguard action they have succeeded quite a few laxities and opt outs one for example would be the definition of core tier one capital which you would think was important the initial proposal in Brussels was for that to be decided by the European Banking Authority in the end it's the national supervisors who will decide what constitutes core tier one capital there are others on the macro prudential area important to have macro prudential that means if the housing market is overheating in Ireland the central bank has the ability to tighten up but it could be abused to ring fence national banks and there are discresions and the resolution area as well so gaps and discresions are an important part of this whole thing and the biggest issue however is the question of who pulls the trigger will it be the commission or will it be the national supervisors again operating through the council and that would be a bad deal I suggest to you if that were to materialise so there are the type of things we're watching finally the consequences for the Irish banks could be important there have been lots of consequences already and to the extent that fragmentation remains the cost of funding to Irish banks will be higher than otherwise and therefore the cost of borrowing from an Irish bank will be higher than otherwise this has two implications it's bad for the profitability of the banks and it's also bad for the borrowers and for the economy the peripheral economies would continue to suffer perhaps through a much diminished extent but nonetheless higher borrowing costs which has a negative connotations of economic activity in the periphery from the banking perspective it could obviously lead to changes in banking structure which interestingly were referred to by Vice President Constancio this morning the first time I've seen this referred to by an ECB spokesperson clearly there will be implications for structure in a way this is an opportunity for the big banks in Europe the ones who are still standing should have the greater firepower and not doing anything about it that's for one of two reasons it's either because they're nervous and have withdrawn into their national shells or possibly also because their national supervisors are still telling them to stay national but you could expect that to change in time and that might lead to consequences and I think on that note I'll stop thank you