 Hello and welcome to Davos and to this special debate brought to you in cooperation with the World Economic Forum. In this session we're debating a topic that goes straight to the heart of Europe's ability to compete. Whether you like it or not, Europe's fortunes are closely linked to those of its banks. And even though things seem to be improving in the European banking sector, there are signs that all is not well. Technical lending to businesses has been shrinking and some companies say it's hurting their growth. All the while Europe is trying to build a banking union, but will that be a help or a hindrance? And to debate how European banks are actually doing and the European Banking Union, we have an all-star cast with us from your right, Wolfgang Schäuble, who is the German Finance Minister, Oli Rehn, the European Commissioner for Economic and Monetary Affairs, Federico Gazzoni, the Chief Executive of Unicredit, Italy's biggest bank by assets. Jeroen Deiselblum is the Dutch Finance Minister, head of the Eurogroup, the now 18 countries that make up the Eurozone. Anshu Jain is the Co-Chief Executive Officer of Deutsche Banker Germany's biggest lender. And last but not least, Lorde de Aetana, Senior Fellow at the Institute of New Economic Thinking in the UK. He was also Chairman of the Financial Services Authority. I want to start by taking a look at the status quo in the European banking sector. There is a general consensus that I think in the analyst community that the European banking sector is doing a lot better now than it was a few years ago. Still though, I want to gauge your mood of where the European banking sector is. And if I can first get your thoughts on that, Anshu Jain. I think we need to take a step back only because it's impossible to discuss where we are today without paying some heed to the fact that a mere 18 months ago, the probability of Italian default was at 40%. The world was stepping away from funding European banks. Cost of equity for European banks was spiraling. Cost of debt likewise. And there was widespread talk about a possible failure of the Eurozone. So we've come an enormous distance in a very short period of time. And frankly, we first have to begin by paying a real tribute to France and Germany, whose leadership, the ECB, the finance ministers, the central bank governors, where frankly it took a lot of audacity, skill, and real discipline to get us to where we are now. So tail risk has now been taken away. So from a macro standpoint, there isn't much debate anymore. But, is there a but? There is a but. So yes, the sovereign picture looks a lot better. As you correctly pointed out, unfortunately, unemployment has actually spiraled. Bank lending is down. European banks are in much better shape today than they were even a year ago. And I don't say that subjectively. The numbers tell the story. Cost of equity down, CDS clearly telling you a story, capital up, liquidity up. The banking sector is in better shape. Nonetheless, a lot remains to be done. And I think the preconditions are now being put in place. The single supervisory mechanism is a step in the right direction. The asset quality review, which is about to come. And we don't know the full details yet. I think it's going to be a huge step forward in terms of establishing transparency and creating trust. But we still aren't where we should be. Three quarters of credit formation in Europe happens via banks, not capital markets. And the banks are not in a position to create capital at the pace where they were. I'll pause here because I know there's more to... Exactly. We're going to come back to those issues for sure, both the stress test by the European Central Bank and the construction of a European banking union. Let's get the view from Italy and from UNI credits. Federico Gazzoni, what do you make of the health of the banking sector? I tend to agree with Anshu about the general picture. If we look at Italy, I would say that overall as well, we have an healthier banking sector because also in Italy, we have seen capital ratios going up. We have seen the liquidity improving significantly. We have seen the leverage is already a very low level and so forth. What are the negative side or the problem to be addressed? Now I would say we have a problem of quality of the asset because it's obvious that due to the recession, the quality of the asset has been deteriorating. So there is indirectly maybe an issue of improving coverage. And what is for me the real challenge for the Italian banking sector is to recover profitability because you can manage, I think, the balance sheet right now because the capital is good but looking forward, restoring profitability is indispensable in order to create capital and to be in the position then to support the development of the economy through lending. So I hope that for Italian banks, asset quality review will be really an opportunity to fix what is left. We have seen yesterday an interesting move, a mid-sized bank that is moving under the European supervision as decided for a quite significant right issue and quite significant increase of coverage in the last quarter. Yes, this is the way to go. So I think that the system is prepared to go through this difficult but positive exercise that is the asset quality review. Commissioner Wren, I suppose you have the European perspective. What's your take of where the European banking sector is heading? I think it's essential that we look at the issue of rebuilding banking in Europe in the broader context of the economic recovery, which is currently going on in Europe. And here there are some important issues that we have to take into account. Of course, first, as Anshut Zain said, the existential threat to the euro is over. And in fact, we have not fewer members in the eurozone but we have more members in the eurozone as of 1st of January this year as Latvia joined. And we are now 18 members in the eurozone. Overall, the economic climate in Europe has changed in the past, I would say, 18 months to two years quite significantly. And in retrospect, I would say that the year 2012 was in many ways a turning point. We had, first of all, an improved enhanced credibility of fiscal policy of the euro area member states. Second, the ECB took decisive action with its LTA roles and the O&T decision. And third, we had by then reformed and reinforced the economic governance of the European Union, especially of the eurozone. All these factors together enhanced stabilization. And last year, we saw the start of the recovery. And this year, our challenge is indeed to strengthen the economic recovery. And in this context, the completion of the financial repair is indeed an essential task. I might add that one factor which makes a difference between the US and Europe is that the United States completed its financial repair much earlier than Europe did. And that is, to my mind, a critical reason why the economic recovery and growth is for the moment stronger in the US than in Europe. Lothana. Well, I think as many of the other speakers have said, the story of the last two years has been a very significant turnaround in the market perceptions of risk in the European banking system, which you can see in CDS, in the funding cost of banks, as Anshu says, in the cost of equity of banks, et cetera. And that is all a very good story. I think what is interesting is that that is not converting into increased levels of lending. We are still seeing lending to the business sector declining and lending to the household mortgage sector very low. Now, I think we've got to be careful of assuming that if we simply have one more heave and we have the asset quality review and the stress test, that suddenly that will unleash more lending. Because I think we have to realize there's something going on on the demand for loans as well as the supply of loans. We've had this proposition for some time that if we just shift the banking system, everything will be fine. I think it's very important to repair the banking system. I think the AQR and the stress test are going to be important next step. But I'd just be wary of assuming that it's somehow going to magically unleash lending if that hasn't already been unleashed by the very significant falls in bank funding costs that have occurred. I think the other thing to say, however, is that the medium term is very important. Important steps have been taken on the banking union, starting really back from the Finance Minister's conference. And I guess it was June 2012 where the major statements were made. But I personally believe it will have to go deeper. I mean, I fundamentally believe that for the Eurozone to work, it has to go to a fairly deep level of federalization, which will require a treaty specific to the Eurozone. I'm slightly out of line with most British opinion on that. And I think many of the steps that are being taken are the correct steps. But I think we'll have to go further in terms of a mutualization of the guarantee scheme. I think if you think about how does a single banking market work in America, there is no way that it would make sense in America for an Illinois state bank to hold its liquid assets in an undiversified portfolio of Illinois state bonds and for its depositors to be dependent on an Illinois state deposit insurance company. If you said that's how I'm going to organize the US banking system, people would think you're mad. That's how we organized the single banking system within the Eurozone. So we've got more to go in terms of reform there. Minister Scholder, let me ask you this question in a slightly different way. Do you have faith in the European banking sector at the moment? Opinion polls suggest that the public, the European public doesn't have much faith in the European banking sector. But do you, the German government, do you have faith? I have faith in the European banking sector. All of us, the European central euro is much houses and it used to be years ago. Of course we have a very different situation in the United States, but it's always a pleasure for me to listen to British speakers to tell the European we must do the same as the United States of America. We are not, we are not. We are not the United States of America. We are not the United States of Europe. We are the European Union. Quite complicated, but we are also successful. Now we, of course, not all problems rely on the banking sector to be very frank. And we couldn't, we wouldn't have to get so much success if we would only have relied on banking sector and monetary policy. We have to serve the problems by fiscal discipline and by structural reforms. And we did it in all countries. And now we are building a banking union to get the same what we need in, since Europe is totally different to other continents. We are several nation states, very different. It's remaining sovereign, sovereign tier. And we have to find solution for this. We do. And we will build this banking union. We have, we have a European banking supervision. It's in the way to be constructed. We have president for this. We will have a vice president. We will have support. So this bank, this supervision will take in, it will take office in the last quarter of this year. We will have an asset credit review in the coming months that we will have a stress test. And then we have a European banking supervision by the ECB. And then we have, we have, and we have rules for restructuring rules for all 28 European members that because it's a matter of single market. We have it already done, the solution directive. We have mechanisms for, we have harmonized rules for deficit scheme guarantees. And we have, we have agreed on a political way in the European, in the ecofin in December, late December on a single resolution mechanism. That have to be approved by European Parliament in the European way of legislation. That is always complicated, but we will get it. I'm quite sure. Mr. Deisselblum, I haven't forgotten about you. I want to ask you about the, the AQR, the asset quality review. Another lovely Eurozone acronym. Another one of many. They're also known as stress tests, the European Central Bank's stress test to the common man. Are you worried that they will unveil something rather unpleasant in the European banking sector? Actually, I rather hope that it's going to unveil some unpleasantness because that would give me a good feeling that it's been done properly. And I think this is key. We're not doing this to cover up and at the end of the day say, oh, everything's fine now. We're doing this to find out what problems remain and then to deal with them. It's going to be a three-fold process. First of all, we're going to look at where the risks are, in what portfolios of different banks, then the asset quality review will do an in-depth survey of those portfolios. And then on top of that, we will stress them, stress the banks on the basis of also their context where necessary, et cetera. The ECB must be absolutely transparent on how they're going to do that. And that's also part of the credibility of the process and it has to be firm and tough. So the answer to your question is, yes, I hope that some bad news will come out of that and that will give me a good feeling. We've done it properly this time. I picked up on one sentence you said there. We must stress the banks. I'm wondering whether or not that makes the banking executives on this panel sweat a little bit. Whether, well, is that what you want to hear, Federico Gazzani? Well, I agree that the stress test and the asset quality review must be tough. And I agree that it would not be acceptable by the market unless we have some evidence of some problems to be addressed. I hope that we're not part of the problem. You too want the AQR to find something that's... Perhaps something... No, really, there is still a clear lack of trust, partial trust from the market versus the European banking system. So this has to be dissipated thanks to this exercise. And I think it's the last step before really we can claim to have a new banking system ready to take the competition from other banking system. Because one of the problems and one of the opportunities that I see here is that having the banking union, having done the asset quality and the stress test, we can finally move to the next challenges, that are business challenges. So the European banks have to compete in the market, they have to improve the service model to customers, have to be ready to compete also globally. Europe is becoming more and more an export-driven region. So we have to catch the business also outside Europe. So let's do this last step. Has to be, as we're again convincing, has to be tough, serious, done with homogeneous rules. This is indispensable in order to have a transparent process. And let's move on. This is what I hope. Lotana, do you think the stress test will be credible? Well, I hope it will and I think it will. I think we all recognize that after the very significant success of the US stress tests in 2009, we did a first round of stress tests. I'm now trying to remember it. I think it was probably 2010 when we first did them. And I remember going through the debates and that at the European Systemic Risk Board. And there was a perception in the market that they weren't tough enough. Now, it has to say that one of the biggest problems we had at that stage was how were we going to treat sovereign debt? Because the market was looking there saying, well, this sovereign debt is underwater. As Anshu said, the CDS was suggesting a 40% or whatever it was default in Italy. But we had a position where we couldn't possibly stress test the sovereign debt. First of all, because it was seen that that was a signal of a lack of confidence. And secondly, actually, some banks would have been deeply underwater if we'd marked to market the sovereign debt at that stage. That was a very particular problem, which I think we are beyond. I think it's very important to have an appropriate treatment of sovereign debt. But in relation to the rest of the portfolio, I think it will be tough. The stress test element is crucial. I think sometimes people assume that you can do an asset quality review, and it tells you definitively the quality of the loan portfolio. I mean, the crucial thing about banking is the quality of the loan portfolio keeps on changing with the economic environment. And that's why you have enough capital to deal with an environment which is inherently unknowable and uncertain. That's what bank capital is there for. And that's why I think the stress test element is almost as important, indeed, in a sense, more important than the AQR. Anshu, Jane, do you think that the rules or the requirements set up by the European Central Bank, will they be clear? Will they be transparent? I suppose that's an issue for you. Well, first of all, let's not create this magic bullet panacea. I totally agree with the Lord Turner. We're making things impossible for the ECB in terms of setting those expectations. The landscape is very complex. Any time you talk about the European banking state of affairs, there were four questions. The feedback loop between sovereign bonds and bank health. Lord Turner talked about that. That's a conditioned precedent. And again, my compliments to the finance ministers and the powers that be, that issue isn't resolved, but it's been largely tackled. That was out of control for us. You've given us that gift. Thank you. Secondly, our capital, our leverage, our business models needed refinement. And again, the point that's been made. The US partially through the forced recapitalization, partially through a very different business environment, got to it sooner. Good news is European banks are now right in the throes of it. And I agree with what Federico said earlier. Enormous progress has been made. And that's demonstrable. So those are two ticks, both of which are positive. Yet interbank lending is not where it ought to be, even within Europe. And of course, the world's willingness to lend to European banks is also not back to where it used to be. That's where the stress test comes in and plays a very important role. There has been this slight miasma hanging over the European banking landscape that, oh, somehow there's stuff happening in those balance sheets that we don't know much about. And I totally agree with the point which has been made by many of the speakers. I personally would much rather take the penalty of a stiff stress test, which has been done to international standards, which, A, makes banks in Spain comparable to banks in Italy, to banks in Germany. That'll be the first time that'll happen. And secondly, done to standards, which are of international quality. So yes, it has an important role to play. And then the fourth and final piece, which we haven't talked about, is completing the regulatory process. So Europe has taken a bit longer there, candidly. Regulation was required. I, for one, believe that the regulation which has come has made our industry safer, fitter, better. But we do need to complete the process. The US now looks like it's, again, one step ahead in terms of there's greater certainty. We need that as well. Get those four things in place. We're in a good place. Let's not create unhealthy expectations for what just the AQR can do on its own. We will certainly come back to that regulation point. But let me just ask, also, what will happen after the stress test? And let me ask that to Minister Shobla, the European Central Bank's president, Mario Draghi. He has said here in Davos that banks that are found to be unsound should be shut down. Do you agree with that? If we will have a European banking supervision and if we will have, since we will have restructuring roles in the resolution mechanisms, of course, this will happen. This would happen if it is needed. That's quite clear. Do you expect it to happen? I think Finance Minister must not speculate. It makes no sense. We do whatever we are prepared, whatever will happen. We will, we have a solution with this fund which has to be built up for restructuring. That is clear. It has to be financed in the interim time until he is fully paid in. We have already agreed on a solution for this. It's not, as always in Europe, it's not very easy. It's complicated, but it will work. As always in Europe, it's complicated and it works nevertheless. And that is the message. Okay, Wolfgang Shobla, he said that the finance ministers shouldn't speculate. What about European commissioners? What happens if a bank fails this restructuring? Should it be shut down? In fact, I can concur with the finance minister with Wolfgang Shobla on this. Neither should a European commissioner speculate. But I would actually like to add that we have now clear rules in place, as Wolfgang said. And we know that we know what will happen in case there is a bank that fails in the stress test. And we have rules that protect European taxpayers and facilitate an orderly bail-in of a failing bank. I think that's very important to enhance confidence into the European economy. I would like to add to what Lord Turner said about the difference between the 2010 stress test and the current exercise. There's another very fundamental difference, which is that in 2010, we had in fact the national supervisors who did the test and there was only a very loose coordination of this exercise. That led to, I would say, perverse incentives so that the national supervisors had an incentive to hide problems. And that explains why, for instance, Ireland and Spain did not fail more banks which only became revealed later on. That was kind of financial nationalism in play at the time. Today, this year's exercise will be led by the European Central Bank. Essentially, it's a supervising arm and now the incentive is very clear for the ECB Governor-Council, for the ECB Executive Board, for the supervisor for Mario Draghi. It's essential that once these banks pass the entry exam to the Eurozone supervisor through the asset quality review and stress test, they are indeed in good order. And I'm sure that Mario does not want to have a big chunk of impaired banks in his hands. I could use a verse of it, but I don't want to use any impoverished words here. I'm sure Mario doesn't. Please remain in your seats, gentlemen, and the audience. We're going to take a short break now for programming reasons. We'll be right back after this. Stay with us here at Falkirk. NFL football game where you get timeouts, which are purely commercial timeouts. This will allow you to have a little bit of a breathe. They're taking a lot of sip of water, and we're going to set off basically in 30 seconds. Is the pace about what you want it to be? Yeah, we're going to have to speed up a little bit. Well, now it's up to you, so you can mix it up. Turn up the heat. We've had our opening salvos. Immediately continue. Crazy, crazy. Good strength. Gentlemen, can I just ask you to take off your badges as well? As if by magic, they'll be gone after the advertising break. You'll have almost somebody who saw the lack of continuity. I have. Never. Have you really ever filmed off continuity? It's really interesting. So IMDB, there's a fabulous website. If you're a movie producer, you can call IMDB. In IMDB, they'll take great movies that they make, and then there is a lack of continuity, which is fascinating. The hand has shifted from the left to the right. Of course, then you've got the ones where the mold shifts from the left to the right. I'm really worried about that. Let's get ready. Let's get set. Second, second, second part. Welcome back to Davos and to this special debate that we're bringing to you from the World Economic Forum here. We're currently debating Europe's banking sector, where it is, and where it is heading. I want to turn to you, Lord Turner. How important do you think banking reform is for the eurozone economy as a whole? Well, I think it is. And then I'll transition into that. This question of what happens after the stress test, because I think it illustrates the importance of banking reform. I mean, I take Minister Schobler's comment earlier. We shouldn't assume that the U.S. gets everything right or it's all transferable, but there are things to learn. And the crucial lesson of the 2009 stress test in the U.S. is that the U.S. had a very clear answer to what was going to happen in the case of failure. And the answer was that if you failed the stress test, you were going to be told you had a certain number of months to raise the money privately. And if you couldn't raise the money privately, there would be a public recapitalization. That's how the U.S. got going again with its banking system in 2009. And going back to the 2010, I remember now the other key problem we had in 2010 with the European stress test is we couldn't give the answer. Well, what's going to happen if countries fail? Now, I think the good news now is that the likelihood of failures of really large banks is much, much lower than it was before. But let's be clear, if we did get a failure of a really large bank, you can't simply say, I'm going to close it down, because when you close down really large banks, you shock the real economy. So you've got to have an answer to the question, what happens if, despite all your measures, you have an undercapitalized, you know, really large bank? You want lots of equity, so that's unlikely. You want bailable, inelible debt, so that's your next line of defense. But beyond that, you've got to be able to put in public capital. And that's the resolution fund. And I think the big danger for the eurozone over the next 10 years is until that fund is in place, we're still running a risk. If things went bad again, if the sovereign debt went back in the other direction, if we were back in a 2011-type situation without the resolution fund already in place, we would be taking very major risks. And that is one of the elements which is required for a working banking union. And until we're there, there is a risk in the eurozone economy. Lord Turner, you're obviously being quite provocative, because I'm seeing the ministers and the commissioner waving profusely here. Let me ask you, you're on Dice Album, what's your reaction to what you just had? Well, Lord Turner is saying that it's all very unclear, but it's not unclear. What we will do is in the main headlines, the same as what's been done in the States, at the end of the process of the AQR and the stress sets, the banks will be given some time to go to markets, to restructure, in other words, to deal with their own problems. If they can't deal with that, I'm putting aside, of course, a category that simply isn't viable. And some of them will simply have to close down. They will be given time to deal with their own problems, etc. Then they will come back to the governments and say, well, I need more money. There is only one rule, really, and that is that the state aid rules will apply. So there will be a minimum required level of bail-in to be put in place once that's been done. Then government money can be put in. If governments are unable to do so, because it's a very large bank or the government's debt position is already critical, then the ESM can step in with the banking program or direct recap of banks from the ESM. That instrument we will finalise in March, so that will also be available on strict conditions on the outcome of the asset quality review, which is at the end of this year. And we will deal with all of these issues, but the instruments are there. That's my main point. Including direct recapitalisation from the ESM, is that clearly agreed? We have agreed already in June on the main headlines of that political agreement. We are now working on the guidelines and we will come back to that in March. That's my planning, we'll be on the agenda of the Eurogroup. It's been agreed that it's part of the package. It'll be on strict conditionalities. It was agreed back in June 2012 and then it's taken a long time to get there. No, but we actually in June 2013 reached quite a detailed agreement on what that would look like and we're now putting that into guidelines. So understanding, these conditionalities are quite strict. One of them is that the deeper bail-in rules will be applied directly. The rules which are part of the BRRD will start, will be general practice as of 2016, but if before 2016 a bank would apply for direct recap, there would be a deep bail-in to be applied first. Andrew Jane, do you think that the rules of the European Banking Union and what you just heard there from Minister Dyselblum is that straightforward to you? It is and I think more importantly actually, let's not forget, this is not going to be a digital event. Recovery resolution exercises have been carried on consistently now over the last couple of years and that's the pace at which we will go. In the event, don't forget, every bank has been forced to stress test itself. Its national regulators have been stress testing as well. So it's not as if we're starting from scratch. In the event, and this will only come about if there is a profound disagreement over valuation. So the way a bank has been valuing its own assets in compliance with national regulators winds up being done very differently under the aegis of an ECB-sponsored stressor. Now walk through it. You'll first go through recovery, then you go through resolution. As you've said, in Europe we finally have credible institutions which we didn't have five or six years ago and the ESM is definitely part of that. The only thing which we're saying which is the difference between the US and Europe, this will not be a pan-European response, it will be a national response. And we already don't forget by addressing the sovereign debt problem, the issue about a country not being able to handle it, there are stress tests for national balance sheets as well. I have confidence when you take all that together, we have what it takes. Wolfgang Schäuble, I want to ask you, is there a clear line of command in the European Banking Union as we look ahead? Is there a clear line of command? And when I say that, I mean, the relationship between the national regulator and the European regulator and the European Central Bank, is there that clear line of command in your view? That is clear. There's a clear line and I think it will work. There are some concerns though that there could be conflicts between national regulators and the European regulator. It's always the same if you make something new. I was a lot of concerns. And it has to be a little bit complicated in Europe because we are one currency, one central bank and several different nation states, member states. It makes things a little bit more difficult. Some don't like to join us. You are invited, you gay, to join us. Yes, I know. It works, but in the beginning there are always concerns. Of course, we have always to have in mind that we avoid disincentives. Therefore, we have to make clear who takes responsibility for what. As long as we don't have the structuring fund paid in, fully paid in, and we all agree on a levy that has to be paid by bank, but as long as it's not... Who can guarantee that the levy will be paid by bank? It's only the member state. Therefore, we cannot allow to leave the member state aside as long as it's not paid in. That makes it a little bit complicated, but it will work, I bet it. It will work, it's decided. We have agreed on all instruments with some bail in rules. Of course, because everyone agrees it's not only the taxpayer takes the final risk. It's quite clear, but it will work and therefore, if there is a need for additional capital, we have solutions that this capital will be raised. Federico Gazzoni, you hear the message today that it will work. Do you think it will work? I'm very happy to understand that the Finance Minister is very committed to the point, so it would be really tragedy if instead of having one regulator, we would have one more regulator. Do you think that's the clear risk of that? I think, I agree. They believe that we will have one regulator, we will have one resolution mechanism, and one day we will have one fund as well. Obviously, it's working in progress, but it's very important in this phase to have the way it's well defined, the way to get there, and it's very important to have this strong political agreement at European level. This is what makes the difference compared to the past. So, I believe that soon we will have a supervision, we will have one regulator, and the banking sector will benefit for all of this, becoming at the end more competitive and more sound. Can I say something about the governance issue? Sure. There have been talks about, for one resolution decision, you would need 120 people and nine institutions to be involved. I would all invite you to... I mean, that's legal text, you don't want to read it, but you might want to look at it, and you'll see that there is going to be... There's going to be an executive board on the resolution authority with five independent members. They call in the national authorities, depending on what bank they're dealing with, and they will set a deadline, and if the deadline expires, then the five independent members can take the decision by simple majority. I mean, that's as basic as you can get, and only in big, big decisions where you need a lot of money out of the fund, then you need approval of the plenary session, the plenary board. It's not that complicated. Five independent members will, if necessary, within a set timeline, take a decision by simple majority. That's the way we're going to do it. Do you agree, Mr. Jayne? If I may, there have been a discussion on the involvement of the council, and I think it's wrong. If, like Tatlum just says, if the board takes the decision, it's done. Of course, we have the Moroni judgment in Europe that needs, that requests a decision by a European institution with the council as the board is not. Therefore, we have agreed on the solution. If commission does not agree, commission can ask the council for a decision. I bet this will never happen because the commission will always be involved in the decision of the board. And if the commission agrees, it's needed for all the decisions. I want to pick up on a point that Federico Guzzoni made before. He said that there needs to be clear political unity when it comes to the banking union. Let me ask you, Wally Rin, there are concerns, there are rumours, that perhaps the commission isn't on the same page as the German finance minister in Germany when it comes to the banking union. Are there those disagreements? In fact, it's quite normal in the European Union decision making that the commission with its right of initiative tries to achieve a, say, first best solution for the whole Europe, while then during the process of decision making, both in the council with the member states and in the parliament, there will be some other concerns at play. And in the end of the day, nevertheless, we get decisions and we stay united behind those decisions and they also become European law and we work according to these final decisions. As to this question on the single resolution mechanism and the resolution fund and the related governance arrangements, I believe that the outcome is certainly defendable. It is much less complex than often portrayed in the Anglo-American financial media. I agree with Jeroen on this, but of course it may be still improved and that's something that in the coming two months, the council and the parliament will need to look into it, but it's essential that we conclude the legislative process by the end of March before the European Parliament leaves for its electoral recess. I just want to talk about the rescue fund as well. It's been criticised for being too small. 55 billion euros eventually in about 10 years' time. Is it too small, Wolfgang Schreiber? We discussed for a long time and I was in favour of a higher figure and others were in favour of lower figures, but we have agreed on a common solution and look, everyone is convinced that he has the best solution and the most pro-European. As a member of the German government, I always convince that government has the best opinion and if parliament disagrees, we have to convince parliament. It's the same with commissions. We have always the best solution and council and parliament have second best solution. That is the way of thinking of governments and commissions, but it's not the way of thinking of democracy. We have found a common solution, but of course in Europe we are bound to stay on the given treaty. It's a legal basis for all European institutions. Parliament, commission, council is the given treaty. The given treaty is not sufficient. As Dr. Neutron just said, we need treaty changes. In some ways it's difficult to get, but as long as we don't get, we have to work on this basis because it's the only basis. If you will impose a bank levy amounting to 55 billion, it will be a question by court and if the legal basis is not sound, what will happen? In court it will be destroyed and that is not for the stability of financial markets. Therefore, we are in favour of a sound legal basis in line with a complicated legal basis. That is exactly the problem we had tackled. We find a good solution and I'm convinced it will work. Okay, time is running. You have to look at the size of the resolution fund also in the light of the new legislation on the bank resolution and recovery, which means that there is more rigorous rules for bail-in which will reduce the need for bail-out and thus it will not lead to such great problems as regards the size of the bank. The Spanish banking bail-out costs, I believe around about 40 billion euros and that was just one country. You have actually three lines of defence and this is related to what we discussed earlier. You have first the private solutions so that in case you need to recapitalise, you go for capital markets and private investors and the European banks have been doing that. In two years 80 billion euros have been raised new bank capital by European banks. The second line of defence, national resolution funds or national backstops, fiscal backstops based on the state-aid rules so that the equity shareholders and junior debt holders would be bailed in according to those rules. And then third, a European line of defence which might in the near future be based on the Spanish model where the ESM played its role with clear policy conditionality, which by the way succeeded. Spain left its banking sector reform programme last year. 41 billion euros were spent, not 100 billion which was the maximum and now the Spanish banking sector is clearly much more healthy and resilient and able to do its basic job. Okay, time is running away from us. We could add if European banks want to pay a higher levy we are ready to think about it. That's a good idea. Maybe a gallop here. We're going to let the audience members in at this stage. I'd like to sort of bring in some questions from the audience. Let me first turn to the lady in the second row. There we go, the lady in black. Please once again keep your questions to questions and keep them brief. I have two questions. I'm Tonya Mastrobuoni for the Italian newspaper La Stampa. The first question is on something that was said here in Davos yesterday by the French finance minister. Mr Moscovici said that the bank resolution mechanism can be improved. So I wonder, I'm asking Mr Schäuble which red lines are there for the Germans and he seems to agree with the parliament that wants to change the mechanism still. And the second question is to Mr Gizoni. Yesterday the governor of Bank of Italy said that the RQR and the stress test might lead the Italian banks to merger and so I was wondering what you think about this. Okay, let's start with the question to Wolfgang Schäuble. Look, there's nothing in the world which cannot be improved. Obviously I agree with Mr Moscovici. We together found Mr Dysenbaum-Pierre and Fabrizio Saccumani, we found the solution. We agreed in December. Of course now we are in three-log with parliament. I have discussed with members of the ECON in Mondi. This week also Mondi to explain and to listen to their position and there we will find the common solution. But once again, the limit is the given legal basis. We cannot go beyond the given legal basis. That's the problem and that makes it a little bit complicated. Alright, the question to Federico Gizoni once again was whether or not the stress test will lead to banking mergers in Italy. Very quickly because the governor knows better than me so I think that some banks will have the need to increase capital overall and they can do in two ways. One is to go directly to the market or to find alternative solution and merger is one. So I think that especially at the level of mid-sized banks this may happen. Okay, next question. Yes, gentleman at the front there. Hi, Davide Cera from Algebra's Investments. I'd like to ask a question to the bankers and to the finance minister. It's very easy for politicians to blame the problem six years after the financial crisis only on the bankers. The reality is one of the reasons why banks are not lending because lots of businesses are not investing and hence they're not asking loans because the liquidity is there in BCB. BCB said, I have a trillion for everyone, a 25 basis point. No one is borrowing. The reason is no entrepreneurs feel comfortable and here's an issue of a politician not have addressed in many countries the supply side. So I'd like to understand from a commission of a politician which pressure you put in, for example, on Italy and other countries may be France yet part of the review process to improve the labour market reform to make it more competitive. The second question on the bankers side, assuming you pass the EQR, both of you here. Next year, are you going to lend more money? Do you believe your customer wants more money or in reality you cannot because there is no good demand? Okay, let's start with a question to Commissioner Ray and I believe. Would you like to pick up on that? I can take that question certainly. In the past, Italy and France, both countries, according to our analysis, have lost market share over the past ten year period gradually and there is a clear need of reform, of strengthening, improving competitiveness which requires a reform of intensification of the reform of the labour market and which also calls for the reduction of unit labour costs in fact in both countries. Now in France there are both plans and we are now waiting for these plans to be concretised, that's very important and I'm looking forward to Italy using its, let's say, recently born stronger political stability to launch a bold reform process which would include, for instance, privatisation and further improvements in the labour market. I believe that in a way Spain and Ireland, also Portugal, they have done a lot to reform their labour markets, their economic structures. They have regained economic competitiveness. They are seeing exports grow and they are now seeing economic growth. Now it's the turn of France and Italy to follow suit and take a determined action to reform their economies and economic structures. Okay, the second question was an excellent one, whether or not or the two bankers on the panel, let's turn to Andrew Jane when it comes to that one. If you do pass the stress test, do you think that you'll step up lending and do you think that European banks overall will step up lending to businesses? Davide, I think your point applies to SMEs more than it does to blue chip, is that right? I just want to make sure that's the case. Now, that being the case, I think we have to clarify that the status of SME, so I also agree with the point and I think that I made it earlier, that there's a demand side problem here as well. It's not just a supply side problem. Now let's go country by country. Germany is in a very fortunate position. The Middle-Stan have come out of the crisis actually strengthened. They've done really well and not just the demand but the supply side is working really well as well. This is not the time for me to give bilateral advertisements. You've got me short but Deutsche Bank has been and other German banks have really stepped into the breach and partly the reason we have 5% unemployment and a strong growing economy is because 60 to 70% of job creation happens through SMEs who are both demanding and getting adequate credit in Germany. That's not the problem. The problem lies in the rest of Europe and I will go back to my earlier four-point issue which is a number of things have to exist. I dare say for Italians, Spanish SMEs to both demand and get the supply of credit which they want. We haven't spent enough time on regulation. I think it's important to note that issues like the definition of leverage ratios in Europe are still not clear. How do we consider a line of credit? The treatment of a revolver. Very fundamental questions are being debated and I would just encourage. We've made great progress on the sovereign debt side. We understand the need for regulation. I will use this opportunity to ask for clarity and speed now because once we have it, I'm confident of a day. Post the AQR, it's good business. SME lending is happening on good terms in most countries. It's technical factors which are constraining the supply. Can I ask you to react to what you just had? I think it's absolutely true that part of the credit drop also in my country was supply and demand side and I think it's been quite a short drop. I hear now from my banks that the giving up credit to SMEs is picking up already. As the economy is picking up, immediately also the quality of the demand for credit is returning and that allows banks also to give out new credit because companies are repaying their loans. The portfolio of non-performing loans is also manageable, becoming more manageable. So it's part of the combination of getting the banks back into shape and the economy back into shape and that I think will be very helpful in bringing both demand and supply side on credits back together. Okay, this debate has passed very, very quickly indeed. I just want to ask you, gentlemen, for your final thoughts of what you think we should take away from this debate and this session here in Davos, if I may start with Minister Scheuble there. I think in all economic discussions we must not rely too much on monetary policy because it's always a wrong incentive and not to do what is needed structural reforms. If we want to have sustainable growth, we have to fight for structural reforms again and again because the world is changing very fast and by the way if we want to work for sustainability we have to work, we have also to have in mind that we have to avoid too much inequality, otherwise we will fail because in this world of communication everyone sees what in formal times not everyone saw and that makes the sustainability of the political framework much more fragile if we fail. Lotana? I think what we've learned from the last few years and reinforced by this debate is the reason why we had this extraordinary knock-on crisis in the Eurozone in 2010 onwards after the 2008 financial crisis was essentially because of an incomplete currency union. We've woken up and realised that a currency union will, among other things, need a banking union. I think very significant progress has been made. Let me be clear, in my earlier assertions that it needs to go further, I'm not at all denying the very significant progress that has been made but it is crucial. This system of a single currency union will not work with a fairly deep form of banking union and my personal belief is it will have to go further still and it probably will because I think this is, as Wolfgang Schöbel has stressed, this is work in progress in an inherently complicated political environment but I think one ought to be aware that by doing it without treaty change a set of compromises have been made and life is not perfect but it's worthwhile keeping pointing out that we could do with getting a bit closer to perfection still. Gerand, I said a lot. I think the lesson learned from the process of the banking union is that political urgency needs to be maintained. We've come from a situation out of the crisis where the sense of urgency was quite strong and we politicians were able to put the building blocks of the banking union in place in quite a short time. My main ambition now is to keep that sense of urgency in putting structural reforms in place, making sure that Europe becomes more competitive and finalizing the financial sector on regulation, the asset quality review, etc. We're not done yet there but we need to keep that sense of urgency to push forward. We can't be complacent with a growth percentage of 1%. It's not enough and we can do better. Oli Uren, very briefly for us. In fact, I was listening to Tim Geithner, the ex Treasury Secretary of the United States the other night and Tim warned us about excessive, warned against excessive optimism and I think Tim, who is almost an honorary European because he supported our fight against the Eurozone crisis very determinedly over the last couple of years may have taken the bad European habit of falling into excessive pessimism instead. So I believe that things are not as bad as they looked then at the time and they are not as good as they might look for some people. So we have to avoid any complacency and we have to stay the course of economic reform both in the member states to have more entrepreneurial dynamism in our economies and at the European level by completing the reform of the Economic and Monetary Union. And finally, in the very short term we have to really look into the problem of lending to SMEs especially in southern Europe which is a very serious bottleneck to economic growth because economic history does not really know a situation where you have economic growth without credit growth. Alright, unfortunately gentlemen we have run out of time I already have a producer shouting in my ear. I want to thank you for being part of this panel it's been a pleasure to hear from you all and I want to thank you in the audience as well for being here also last but certainly not least thank you to you at home for watching. Frans van Keert, do stay with us.