 Good afternoon, I'm Sylvia Maro, correspondent at CNBC, and I would like to welcome you to this panel on the future of European banking. We will be discussing next steps to further integration, and in order to do that, I'm very pleased to say that I have with me four very special guests. They are Jean-Pierre Moustier, operating partner and sponsor at Pegasus Europe, David Livingstone, CEO for Europe, Middle East and Africa at Citi, Jose Manuel Campe, Chair of the European Banking Authority, and John Berrigan, Director General for Financial Services, Financial Stability and Capital Markets Union at the European Commission. Thank you all for joining us today. Now I would like to start our conversation by looking at one of the most controversial subjects in the banking union, and that is a European deposit insurance scheme, or it is. We're actually running a poll on this subject, and I will be focusing on that in a moment. But for now, I would like to start with you, John, and asking you if you think that now would be a good moment to revisit the proposal that the Commission made back in 2015 for a European deposit insurance scheme? Yes, now would be a good moment. I think there have been many good moments in the past, so this is just the latest good moment to look at this, because as I think we have made clear up on the Commission side that we see this as a missing part of the banking union architecture, an important missing part, which influences the effectiveness of the other two parts. So we're very happy to have this SSM in place, we're very happy to have the SRM in place, but without this last part, we don't think the banking union is going to function efficiently. Why do I say that? Well, I think it's for two reasons, one, there's a sort of principle reason that if you are presenting the banking union as a single jurisdiction, then all depositors should be equally protected across that jurisdiction, and the way you do that is through having a European deposit insurance scheme. The second is one of more efficiency, it's about aligning incentives within the system. We have collectivized the way in which decisions are made at supervisory level and in the need at resolution level, but we have not yet collectivized how we manage the costs of those decisions, and that can create certain, how do I say, intentions within the incentive structures of the banking union as a whole. So I think it is a good moment to do it. When you say revisit, I guess you're asking me whether I think the same proposal should be put on the table again. Well, we liked our proposal, we still like our proposal, we still think that the full loss sharing model is the one that should be in place, but we recognize that there are other views around the table and that there is more consensus around the liquidity based model as at least a fourth step. So in 2017, which is about two years after we launched the first proposal, we pretty much accepted that we might move towards this hybrid model of a liquidity first followed later by a loss sharing model. For us, it will be suboptimal, but okay, if this is the way the consensus is, we are more than happy to push that route. But we do need to make some progress here on the deposit insurance scheme, because as I said, it is the missing piece. And it sort of completes the architecture and makes sure that all parts of the architecture work optimally. So in short, yes, this is a very good moment to revisit it. And actually when we compared 2015 with Europe now, one of the big changes is, of course, the next generation EU funds. And when this decision was made back in 2020, it was described as a historic step for the block. So I would like to ask you, Jose, whether do you think that big decision that the block took in 2020 and these funds are a sign that the block, in particular the Euro area, is ready to have new talks on a European deposit insurance scheme? Well, good afternoon, first of all, to everybody. Thank you for inviting me. I think that the next generation EU is clearly a sign that Europe is ready to make bold steps to move towards the European project. That's why I very much share Sean's view. And now it's a very good time to revise this opportunity to do this as part of that European project going forward. Now, I think that one of the key components to allocate European funds across the European market is to have efficient European level financial sector intermediaries, both banks and markets. And the banking is one of the key components on that because it facilitates cross-border integration of European financials through banks. And as Sean said, I think it's important to keep in mind that until we've finished edits, we can't really say that the other two pillars are working to their potential. And it's important that we continue to have the full conclusion of the banking union so that we can really have a full implementation of the possibility, and particularly the degree of cross-border banking within the Union, particularly within the Eurozone, remains lower. I think that we all anticipate it will be in 2013 when the Union, when the banking union got started. And I think it's important that we reflect on that fact ages later and we continue to push to finance the money so we can have more private re-sharing. Right, you mentioned there how important the next generation EU funds. But back in 2020, the difference there was the fact that there was political willingness to take that, as you described, bold step. Do you think, Jose, that right now there is a similar level of political urgency to also address the fact that the banking union is not completed? Well, we'll see. I mean, it's clearly we're in a moment in which it's transitory in a number of countries. We have an entering government in Germany. We have elections coming up in France. Those are two very big countries in this process. But at the same time, we have a commitment from the president of the Eurogroup to try to continue to pursue this agenda. So I think it's important that he wants to pursue the agenda. He may not be immediate, but at least we should make sure that we keep it at the top of the list so that when the consensus or as you said, the momentum and the political momentum is there, it takes place and it's implemented as soon as possible. Right, let me turn to you, David. And given your background at Citi, I was just wondering whether do you think a European deposit insurance scheme could actually help the work of non-European banks in the euro area? I think it, of course, can. I mean, primarily, Edith is directed at retail banking and within the union and for European banks competing from outside the euro zone or outside the union in retail banking is difficult, particularly across border. So I think it is primarily the benefit of Edith will be for European competitive institutions. But I do want to pick up on just a couple of points that Sean and Jose have made. One being your question around the model and whether the model of Edith should be a full-loss or liquidity-based model. It's worth remembering that the US Federal Deposit Insurance scheme took 50 years and 150 different proposals before it was successful. So I don't think we need to be too negative about the need to have a debate and some time to reach the conclusion. But I also think that Jose made an important point, which is that for the financial sector broadly, the combination of banking reform and markets reform and further integration is really those happening together will be really the test of whether there'll be full delivery of further integration within financial services in Europe and particularly in the euro zone. Right. And I would like to hear from you as well, Jean-Pierre, on this one, because obviously with Pegasus Europe being the biggest spike in the continent focused on financial services, how do you see a European deposit insurance scheme? Do you think there is any sort of merit in the idea also for your business? The short answer is no. Let me take a slightly provocative approach here. I fully understand and agree with John's argument to say it would be good to have a deposit scheme which could be the same for all European citizens. That's a point. Would that help in terms of cross-border integration on the banking side? I don't think so. I think the political cost of having a European deposit insurance scheme is going to be high. It might take still many, many years. And if we want to look at what could be helping in terms of cross-border integration, that should not be the first point to deal with. So nice to have probably a very unlikely to happen in the short term. So we can look at other actions that the ECB has taken in order to support more integration, which can bring a European banking sector which will look like European. And I think one of the very important points and the difference between Europe and the US is that when you speak to investors, they look at Europe as the sum of countries. An investor will speak to you and will tell you I'm investing in US banks, but he will not tell you I'm investing in European banks. He will tell you I'm investing in a German bank, a French bank, an Italian bank. And so we need probably to have more regulation, and the ECB is here for that, to have a more uniform banking sector. So that investors when they invest in bank know what they invest about, and they can see that a bank in a country is looking exactly at the same in another country. It is good help, but there are many other things to do in order to have a true European banking sector. I'm glad you raised the differences there between the United States and the Euro area. And I'll focus on that in a moment. But for now, let me just share some thoughts from our audience on a European deposit insurance scheme. We have been asking the participants to answer the following poll. We ask them, is it is a reality within five years? The possible answers were yes, no, and if there is another financial crisis in Europe. So let's have a look at the results. And I have to say that 42% of our participants said, no, that it is will not be a reality within five years. And that is really the majority of the answers. And then very close to that, 30% of participants said that there will be a needless if there is another financial crisis. David, what do you make of these results? Are you surprised that not many people are expecting a European deposit insurance scheme in the near future? Frankly, no. I mean, if we think about some of the expectations and pace of some of the reforms, generally around the banking union and also capital markets union, I think your audience is being probably realistic. That doesn't fundamentally change, though, whether it's a positive step for overall banking integration. So I'm not surprised by that. On the second bit on the financial crisis, it depends. We sometimes look in the rear view mirror at the last financial crisis rather than the headlights of what could cause the next. And no one really anticipated the pandemic would cause a health crisis leading to an economic crisis that didn't create a financial crisis in part because of the steps taken after the financial crisis in 2008 in the banking system, supported by new supervision and regulation is certainly sounder than it was then. So, but I don't really see myself that a financial crisis is needed to trigger progress on EDIs. What about you, Jean-Pierre? What do you make of these results? And indeed, perhaps if there's another financial crisis, we will see a European deposit insurance scheme. Well, I think that we have to look at what happened during the COVID crisis, which has been a catastrophe from a health point of view, but has been extremely well-handled on one side by the regulator, on the other side by the government specifically. And the combination of having a stronger banking sector thanks to the actions taken by the ECB in the previous years, specific actions were taken which way, not creating unanimity to set the list within banks in terms of postponement of dividends, which was as much a political issue than a proper regulatory issue in terms of capital. Action of the ECB to provide temporary relief on some of the regulatory constraints and the government actions for the guaranteed loans to support the economy were absolutely tremendous and something we would not have been able to expect. So I think when you look at this answer to the crisis and you put against that EDIs, you can see that EDIs would not by itself have been able to solve the COVID crisis. And that the government and the ECB have been super proactive and extremely brilliant about dealing with that. This is why I think the focus should move from EDIs towards more regulations so that European banks are much more similar in terms of the way they are dealt with, so which means more ECB and maybe less domestic central banks and to have as well a way to encourage a little bit more cross-border integration. The ECB has been doing that as well in a certain number of instances in terms of recognition of bad will in terms of temporary relief on models, et cetera, which are probably more important for us to move forward. Right, and often we talk about the risks of not completing the banking union to financial stability. But what we witnessed in the wake of the coronavirus was actually the system worked pretty well. So do you think, John, that perhaps there's a scenario where the euro area, the financial services in the euro area can actually flourish even though the banking union is not completed? Well, I think it's important to distinguish between two types of crisis. I mean, the COVID crisis and the financial crisis that proceeded in 10 years were very different things. I mean, the COVID crisis was a symmetrical shock to the economy, which did not involve the financial sector directly. And in fact, the story of that crisis was that the financial sector and the banking sector, in particular, were part of the solution this time and not part of the problem. So that's the story we tell. But let's go back to the previous crisis, 10 years earlier, which was a crisis which emanated from within the financial sector. And that's what banking union is about. It's about preventing and managing that kind of crisis more effectively. So I would not draw too many lessons from what we just had in COVID for what might be a future financial-centric crisis coming forward. Just to remove any doubt, I do not believe that EDIS is the silver bullet to a cross-border banking system in the EU. EDIS is part of a much broader series of steps which we have to work on. And Jean-Pierre raises some of those. But what I will say to Jean-Pierre is that if he wants to make progress on these other areas, we will have to make progress on EDIS as well. This is just the reality. The poll is interesting for me because it's a difficult moment. We're in a sort of bad equilibrium at the moment where everybody's stuck around the banking union and everybody is focusing on the costs of moving forward and not at all on the costs of not moving forward. Now, if you focus on the costs of not moving forward, then the second answer to your question, the one that says we have to wait for a crisis. Why will we always have to wait for a crisis to make steps forward? Why is every step forward in institutional architecture only at the expense of huge damage to the actual banking system itself? So it seems to me this idea that Europe can only step forward and we must wait for the next crisis and before we make steps forward in institutional arrangements is pretty wrong-headed in fact. Because if you think of what the banking union, we got part of the banking union because of the crisis, but actually we lost the integrated banking system in that crisis. So now we have the architectural for an integrated banking system, but we don't have the integrated system itself. So this idea that we should just sit here and do nothing while we wait for the crisis and then when the crisis comes, we'll make great steps forward. It's a little bit inefficient for me as a way to make progress. So I think we need to focus much more in advance on the costs of not moving forward. And the cost of not moving forward is that we will not manage the next crisis as efficiently and effectively as we should. Right, but let me challenge you on that point for a little bit because history does suggest that the European Union tends to take bold actions in times of crisis. You mentioned of course the costs of not moving forward on this front, but do you think that the heads of state and finance ministers recognize the urgency in moving in this space? I think the reality probably is at this stage, no. I think that that is why we're having, as I said, a debate which focuses much more on the costs of moving forward and not enough on the cost of not moving forward. I suppose it's the job of people like myself and Jose Manuel and I'm indeed Jean-Pierre and David to make the case the other way around so that people do in fact understand that getting these institutional changes in place ahead of the crisis is in fact the logical and efficient way to go forward and not to wait till the sort of the horse has bolted before you put in place the defense mechanisms. Right, on that point, let's focus now on the current landscape in the banking system because we did see quite a lot of action in the wake of the virus from regulators, from central banks and so on to of course mitigate the shock. But do you think Jose, how essentially has COVID impacted integration? Do you think that the pandemic has perhaps delayed that process? Well, it's important as Jean just saying, I think it's important to highlight that over the last eight years we have built the institutional infrastructure for a banking union, while at the same time we have observed that the banking sector remains more fragmented than it was at the beginning of this process. And that's a challenge for us. I think the COVID crisis has helped in the restructuring of the sector in some ways. Banks continue to enhance their operations to reduce their cost base with some consolidation at the same time. But that consolidation again continues to be primarily around domestic lines in the specific countries and there's relatively little, not just cross-border consolidation, but in increments on cross-border activity. And that's an area of concern for us as we go forward. I think that the crisis itself has not really helped the banks deal with any of their long-term structural challenges that they were confronting. And particularly in Europe I will highlight too, this means mainly relatively low profitability, the return on equity of the banks in Europe has been low, particularly what compared to the US counterparts, which was highlighted before as well. And the second aspect is the need to do a significant technological transformation due to changes in technology. At the end, banks is an intermediation industry and intermediates in the financial sector. And like most intermediation industries in other sectors of the economy is being very affected by technology. And the banks need to invest in that technology, they need to transform themselves, be ready to compete with new competitors that may be bringing that technology into the banking sector. And that's a challenge that they need to confront. In that part, I think actually COVID has accelerated the pressure to do that on the banks, and the central part has increased the bank's plans to move in that direction, which is a good step forward. So just to clarify, would you say that the pandemic has actually boosted the argument for more integration? Oh, I think for sure that the pandemic has boosted the argument for enhanced adjustment of the production of banks, particularly the area of the technological transformation. And that usually applies more integration because it requires big investments, big economies of scale and size. There is an important component. So I think that has accelerated the part of the integration. But unfortunately, as I said, what we have seen so far has been primarily at the domestic level. Right, let me turn to you, David, because we did see some authorities restricting intra-group distributions. Do you think that cross-border institutions have the ability to transfer sufficient resources in times of crisis like this one? It can depend on structure, of course, and particularly subsidization versus a branch network. And I think, but I think the ECB and EBA have been very clear about the encouragement for European institutions to use that ability to have a branch network throughout member states and to move to that, recognizing that that's not easy if you're in a different structure today. So that does allow for greater flexibility of liquidity movement and so on. But I think it's worth reminding that it's not just on the basis of liquidity that banks either compete or respond to a stress period. So just going back to what Jose was saying, that if you think about what banks are dealing with in Europe, even pre-the crisis, they're dealing with negative interest rates, they're dealing with low valuations in the public equity markets of below book value. They're dealing, as Jose said, with huge digital disruption in their core activities. So those are the issues that they're going to put at the top of the list and say, does cross-border integration help or harm that? And for a number of reasons, you could say that from an execution risk point of view, that's not what I want to do right now if you're running a bank and say, actually, I want to focus on these other things. And in an environment where, certainly coronavirus, the pandemic, led to massive liquidity increases in banks. And indeed, that's one of the challenges, the challenges on the asset side of balance sheets at the moment and finding growth. And that ultimately comes back to the investability of a bank. So yes, integration and going cross-border to compete might be helpful. It might be good integration from a cost-saving point of view, but it's not always going to be the case that that cross-border integration is going to solve some of those fundamental problems that the banks are exposed to. Let me just make a side note here to tell our audience that if they have any questions to send them over, because I will be opening the floor to questions a little bit later. But let me go back to that point of low profitability. John, in what ways could the integration help with some of the challenges that the banking system faces at this point in time? Well, like again, I mean, we have to be careful that we don't sort of start looking for silver bullets all over the place here. I mean, there's a lot of work has to be done in very many areas of the banking system, but in integration, we believe, I think Jose Manuel also will say, is part of the solution. It is not the only solution, but it's part of the solution because integration can allow, as Jose Manuel said, a scalability, okay? It gives the banking system scale. It gives us a broader domestic market, a more accessible domestic market, and that allows certain deficiency gains. You know, the standard economies of scale, economies of scope discussion that I've been having since 25 years in the commission. I think in particular today, what we're finding is that in the new credential environment where banks are holding, of course, a lot more capital than they used to hold in the past, the management of that capital and the management of liquidity across border is quite complicated in the European Union. And this is complicated because of a legacy of the crisis itself, which has resulted in this famous home host discussion where we have a problem, let's say, in efficiently organizing capital across groups when they also have to cross jurisdictional boundaries. So if we can get somehow an arrangement whereby capital can be managed more efficiently from the center, liquidity can be managed more efficiently from the center, while at the same time, reassuring those host member states to those banks that in times of difficulty, they will not somehow be left behind, then that will also be another way of developing their efficiency. So I think in these two ways, through sort of kind of operational efficiency and then this economies and scale and scope, this is how integration can help. Is this a magic sort of solution? No, but it would be an important contribution, I think, to making the European banking system more investable, while of course, other structural reforms will also be required. And of course, they will have to address the digitalization challenge, the climate risk challenge. So things which are not necessarily directly linked to integration, but integration I think would be a useful assistance in managing these broader reform challenges. Right, actually I would like to focus now on some of the points that Jean-Pierre essentially highlighted earlier in the session between United States and the Euro area. And so I would kindly ask our technical team to show a chart that our colleagues at the ECB put together for us very kindly of them. And essentially the chart, which I hope you can see on your screen, highlights the total number of assets and credit institutions in the Euro area and in the United States between 2008 and 2020. And it shows very clearly that the US managed to consolidate while also increasing total number of assets. But that was not the case in the Euro area. So Jean-Pierre, are you surprised by that? And essentially, how did the US manage to make consolidation work? I think that the big difference between the US and Europe is that the US is a truly single market while Europe is not. There is a fragmentation, natural fragmentation in Europe is to address a client in Italy or in Germany, retail and corporate. You need to have a very, very specific offer and a very, very specific environment. While in the US, you have the same language, you have almost all the same rules from a tax, a fiscal point of view, accounting point of view, et cetera. So I think that naturally in Europe, the single market could work partly on the trade side but does not work on the banking side per se. Which means that for European banks, it's more difficult to get critical size because the critical size need to be done in market but cannot be done on a cross-border basis with very, very little synergies. And to go back to what was said, I think COVID has been a wake-up call for everybody in terms of our clients are going digital, our branches are closed, they are not coming there. How can we accelerate the transformation? And so European bank have to accelerate their transformation, which means more simplification of process, digitalization, basically automation, but they rely on smaller market, which each have to have a specific solution while the US has a big market where your break-even cost might be much lower. And so I think we are at a structural competitive disadvantage in Europe, not to say that we cannot overcome that, but we have to be mindful of that. And clearly, we need to accelerate the transformation. I can see that moving from the banking sector to being a spark and investing in those companies and looking at a new business model, the transformation of the banking sector is much more important than the integration. When you have a minimal critical size in the country, you need to hurry up massively in order to find efficiencies, better quality of the service of clients and cost efficiencies. All right, so you've highlighted there some of the structural challenges. So David, what other points would you I highlight between the differences of operating in the Euro area vis-à-vis the United States? So your chart is interesting, but it does hide a couple of points. Firstly, that consolidation in itself isn't, as Sean said, it isn't the silver bullet to everything. And the more important dimension there was asset growth. And that's clearly linked to economic growth over that period as well. And the U.S. experienced higher growth in that period. But outside of the banking system, it was also the development in the U.S. and I think it probably even more starkly different of the depth of wholesale and capital markets which went alongside that period of asset growth in the U.S. banking system. So the positive reinforcement of both banking, bank balance sheet assets, as well as the depths of funding markets available to participants in the economy, I think would really be the measure of distinctive strength of the U.S. in that period relative to the EU. And that's why going back to an earlier comment, that as we progress on further integration, banking union and so on in the EU is not to forget the benefit that will come to the EU and the Eurozone from continuing the reform in capital markets. So today, three quarters of funding of debt lending is on bank balance sheets. And that's a structural over-reliance on bank balance sheets. The other point about the U.S. is worth remembering. In retail banking, the U.S. remains a very fragmented and locally based. There are national banks, of course, but there are, as your chart shows, hundreds of thousands of local well-supported operating banks. So integrated European banks don't have to come at the expense, maybe, of continued member state banks. But it really sets the objectives, it seems to be that both of those would continue in a future construct within Europe. So what would be your advice, David, to European authorities? What should they do? Well, I think they're doing what they're doing, but recognizing that, as I said, that they could continue to reform in both elements of the wholesale and the banking markets will really be of benefit to be positive reinforcement together and don't let one go behind. But also, and I think Sean hinted a little bit at this as well, which is that don't lose sight of domestic reforms within member states that can also facilitate ultimate European integration and keeping making progress on those points of harmonization. And the private markets will take the opportunities as they arrive against those frameworks, which are undoubtedly more positive and encouraging over time. Jose, what do you make of this advice? No, I think, first of all, I take it very seriously and I concur with most of what has been said. You know, I think that the chart is very informative in highlighting also that the banking sector in Europe was bigger than in the U.S. in 2008 and it remains bigger today, which indicates, as David was saying, that there is much more reliance on banks as a form of intermediation in Europe and that's becoming relatively smaller than it was the difference in 2020 that was in 2008. Part of that was intended consequences from the crisis, from the crisis, you know, part of the reforms that were put after 2008 were actually to decrease some of the large balance sheets on some activities that the banks had that proven not to be prudent. But as we go forward, I think we need to work on building that re-establishment of the two pillars and I'm not talking about banking union, well, three pillars of banking union, talking about the pillar of the banking union and the pillar of the capital markets union and make sure that we're able to develop really fully functional financial markets that can complement each other. You know, and I think that chart to me shows on the U.S. part of you, the growth of capital markets and active capital markets are clearly complementary and do not come at the cost of growth of banking activity. On the contrary, they support each other and that's very important as we go forward. So I think that's one part of the agenda that goes beyond banks, but it's important to continue and I know the commission is working hard on this and we need to continue to pursue that part. On the banks, I would say that the second thing that the chart highlights clearly is that the trend towards consolidation or less number of banks is common. It's not European-specific. It's really driven by more drivers that are prevalent both in the U.S. and in Europe. I think, again, here technology plays a major role. And I just would like to highlight that one point that David said, which I think is important. You know, further consolidation on husband does not necessarily mean that it should not be a large presence of different banks and different business models within the European Union. That's really who exists. It just means that at least at what top level we need to make sure there's adequate private resharing and the ability to transfer funds across the Union effectively so as to seek investment opportunities in any part of the banking union that arise regardless of what the savings are taking place. There's like a room for that. That needs to be further developed. Right, so John, perhaps you could highlight a little bit the focus of your work at the moment and whether the commission has these structural challenges in mind when preparing new proposals. Well, let me start with this issue of the Capital Markets Union. I mean, I think I agree with what David and Jose Manuel said and what Jean-Pierre said. I mean, they are complements. We've always presented them as complements. I think they've not always been seen as complements in some of the member states. Some see this as a sort of zero-sum game. We do not. And the US is a good example of where a very vibrant banking system and a very vibrant Capital Market can coexist. So we need to get this point across more clearly and we are trying to do that. In terms of the challenges we are addressing in banking, we have just completed the last part of the Basel reforms, which is the last part of the kind of post great financial crisis reforms. And I think that brings to an end this particular chapter, which is the sort of recovery from the global financial crisis. Looking forward now, we're gonna have to start focusing on some of these. And I think to be fair, analysts in the market have already moved on to focusing on some of these broader and bigger challenges to the banking system, coming from externally, from issues like climate risk, but also the digitalization challenge, but also internally where regulation can help, but it's not the main driver in terms of operational efficiency, cost structures, et cetera, of banks, which I think are a reform agenda, which the banks themselves have to undertake. But in these other areas on the outside, like climate and digitalization, in the legislation we are putting forward, and these don't only apply to banks, of course. These are these are better challenges to the system as a whole and to the economy as a whole. We are trying as far as possible in our legislation to prepare the banking system for the climate risks. So on our side, we are trying to in-build into our legislation ESG factors, allowing the supervisors to ensure that the banks take those factors equally into account. On the digital side, anything we do always takes account of how the banks will interact with digital challenges. But I don't think in terms, and I want to be clear here that there are some challenges inside the banking system, which I think only the banking system itself can address, and that relates to the operational structures, the cost structures, et cetera, where the banks themselves will have to take charge. And we will do what we can in legislation to facilitate a vibrant functioning banking system going forward, but I don't want to give the impression that the solution to all the problems in the banks are going to be delivered to the regulatory or supervisory field. Of course, but it does have an impact. And actually one of the main obstacles that people mentioned when looking at the banking sector in Europe is the fact that it is difficult to see cross-border mergers. What do you think can be done on that front, John? How can the commission essentially support more cross-border mergers if banks decide to go down that path? From the commission's point of view, I mean, this would have to be done through the legislation, we propose. And of course we are trying to reflect the banking union in our legislation. So we have tried in the past to address this home host issue, as I mentioned before, by somehow recognizing the banking union, albeit incomplete, but recognizing in the legislation by allowing, to some extent, the centralization of capital management and the centralization of liquidity management at the parent of a group, of cross-border groups, helping, therefore, making it more attractive, therefore, for banks to become cross-border. I have to say those efforts have not been always being successful. The member states in the final decision have decided not to take those offers, those suggestions on board. We will continue to try to reflect the banking union as far as possible in the proposals that we put forward, try to reflect the banking union as a single jurisdiction in the legislation we put forward. But I have to be honest, this ultimately is a decision to be taken by the co-legislators. And at the moment, these suggestions we're making are not being taken up. And I think that is an issue. And I think legislation does need to be made more cross-border banking-friendly. Let me turn to you, Jose, on that point. And what do you think the ECB, as a supervisor, can actually do to support more consolidation in the block? Well, I think that the ECB has to work with the greater environment that we have, right? And Sean just clearly indicated to us that the difficulties in making that as friendly as it could be to facilitate the consolidation of capital and free movement of liquidity. But the ECB itself can try to encourage groups to work within the regulation to do that. And there's been significant moves that have been put forward this year. Earlier on, they put us some guidance on how they view MNAs, projects going forward, particularly cross-border ones. Andrea has also made some important statements about how he saw the banks could engage more cross-border by either having contractual arrangements within the subsidiary framework to try to provide sufficient confidence to host regulators of the subsidiary that support would be there from the parent if needed or when needed. Also, he also highlighted the possibility that the branch network, and David made a reference to this earlier on, also has for facilitating the central management of capital and liquidity within the union, those are steps that come before forward. I think as the SSM becomes more and more established as the single regulator for the larger banks and that's really respected, accepted by now in the financial sector, it'll become more and more obvious that they will have the ability to fully assess a group, how they operate within the banking union, and that will facilitate that cross-border activity. So I think of the day-to-day implementation of their supervisor practices, it's important that they need to signal that cross-border activity will at least not be penalized, but on the contrary, if it makes sense from the sustainability and from the business model point of view of the bank, it should be pursued and encouraged. Right, I would like to focus now on some of the challenges that will essentially pave the way for the future of the banking sector in Europe. But before I get to that, I just want to share one question that we've received so far from our audience and please send more over if you have questions to our panelists. This one is from Jesper Berg and he asks, isn't the probability very low that a deposit guarantee fund will ever have to make a payment given the depositor preference in the BRRD? Jose, perhaps you want to take that one. Sure, I have to do that. I fully share Jesper's point of view. It's probably likely that the deposit guarantee fund will not be used in nothing else. So we also have built this second pillar on resolution, right? One of the key features of that pillar on resolution is that for the large systemic banks, particularly will be resolution and no tax budget money will be involved in this being built up of additional capital requirements. So it is true that the likelihood of usage may become lower over time of the deposit guarantee funds, but at the same time, it's not a question I think, and here Shion can help as well, but it's not a question of how likely is it going to be used, but how palatable is for national authorities to accept that there could be some mutualization of that potential use if it were to be taken going forward. So I think it's the fear of that mutualization that is deterring more active movement in progressing towards a single deposit insurance. Actually, I do have a question on that as well because the problem with a European deposit insurance scheme is this difference of opinion within the block. We have this North-South divide essentially. So how can the European Union square those differences, John? Well, I think they can square them by pointing out that they're not there. In fact, the European deposit insurance scheme is not designed for one part of the European Union. It is designed to cover all depositors in all parts of the banking union. So that's the main thing is to simply deny that this difference exists. Okay, this is not, no one is creating a European deposit insurance scheme to help one part of the banking union. It is there for all of the banking union. And of course, we all know how deposit insurance works. Deposit insurance work, it doesn't work that it covers the entire deposit base. It covers the marginal depository. It is there to instill confidence in the system. You hope you never do have to use it. You hope that the system is so confident, that so confidence building that you don't actually have to use it. But the fact that it's there is what, this is the paradox, the fact that you have it is what makes it never necessary to use it, which you must have it there. And as for the deposit or hierarchy, of course, in resolution we have depositors very much the top of the hierarchy and in liquidation it's also there, but that doesn't mean you don't pay out. So the deposit insurance doesn't take losses, but the deposit insurance has to pay out after so many days. The insolvency can take months, can take years. So you still need liquidity in the system. So what I think Jesper is saying is that the deposit system will never take losses. I agree. I think it's very unlikely the deposit will ever take losses. But we have a requirement under the law to pay out within seven days. It's rare and insolvency is completed in seven days, I can tell you. So that payout is still needed. And of course, if you want to use it for non-payout functions in some parts of the union, that also has to be there. So the depositor hierarchy protects the depositor insurance scheme from losses, but does not protect it from the need to pay out the liquidity part. And that's one of the reasons why from the commission point of view, we are willing to say, okay, we will split this idea into a liquidity plus a loss sharing because we know that the most important function of a deposit insurance is that liquidity phase. And therefore that has to be in place. So I think my answer to your question is there is no difference. It's there for all depositors, but it needs to be there to give confidence to all depositors north and south. Thanks. All right, so let's switch gears now and focus essentially on some of the consumer trends that we have witnessed in the wake of the coronavirus because they have supported indeed the rise of digital finance. And so this is definitely going to be one of the main themes for banks in the block as well as we move forward. And so I would like to ask you, Jean-Pierre, whether do you think that as digital finance develops even further, these talks on further integration will ultimately become obsolete? I think that for banks in Europe, the priority if you have a decent critical size in your reference market is not to integrate further but to transform and think David mentioned that as well. So the transformation of banks is something which is extremely complex. When you start from your legacy system because you have to review your process, you have to simplify them, then you have to automatize and then digitalize. So digital finance is something where the banks are going to compete against a certain number of alternative proposal coming from FinTech. But banks can actually partner with FinTech and in the development and our search for business combination, we have seen an extremely interesting business model where actually banks can use on a white label basis a certain number of FinTechs which can offer very good services on the wealth tech side, on the insure tech side, on the payment side, which give them immediately a product for an API which can be offered to their client which is extremely easy to connect to their system. We'll allow them to have a much better consumer experience a much lower cost and an ability to transform much more quickly. So I think we need to look at alternative way to accelerate this transformation which can be a collaboration between a certain number of partners. And we can have as well more collaboration with banks on something which is linked for instance to the regulatory side on KYC, AML where banks can pull together their resources in order to deal with a problem which requires critical size and a sharing of expertise. So that's the priority. We need to be a bit innovative about the way we apply this new business model. Right, David, do you think that banks are ready to be innovative and the joint forces with FinTech to develop their digital finance offerings? So I firstly absolutely agree with what Jean-Pierre said in terms of how the landscape continues to evolve that banks are not just standing still waiting for the next FinTech to say here's where we're going to disrupt your business model and that's been the case for a long period. Some of the best innovations in payments and cross-border payments now have come from the banking system but there's no doubt that competition from FinTech is there and it's good but it has moved more towards the partnership model where particularly at the boundaries of the regulated and unregulated system that banks have the benefit of knowing how to operate and navigate and have a positive business model inside the regulated system. And Jean-Pierre mentioned AML and KYC which is an area where there is still today sort of perhaps differential treatment between the regulated and unregulated system and we must remind ourselves that ultimately good AML and KYC procedures are for the benefit of the entire system but the burden does at the moment fall more on the regulated system to keep that in place. So I think that overall banks are ready and capable of transforming but as Jean-Pierre said it is fundamental work based on upgrading of legacy systems and getting processes to match the client experience. But the great thing about the outcome of the response of the pandemic is that clients retail and wholesale are now very used to digital system, digital delivery and all of that. If there was reticence that has dropped and so banks can be confident that their customers will want and respond to these digital capability and system being presented to them. Right, we have received another question from our audience so let me share that when we view as well. This one is from Isabella Bufaci I hope I'm pronouncing that correctly. And the question is given that many European firms are global players, what can EU regulators and legislators do to help Europe's biggest banks become truly global players so that EU banks can globally compete with US giant investment banks and prepare for the arrival of Chinese giants in Europe. Jean-Pierre. That a level playing field will be important. So banks have looked at for instance at a new regulation which could be seen as impacting more negatively European banks versus US bank for instance or level playing field making sure that when non-European banks come to Europe they don't benefit from a new advantage and if they reach a proper critical size it will be regulated in the same way. But for a large extent the regulator should do nothing. It's for the banks to act and for the banks to move. I think the ECB has done tremendously when during the crisis is helping bank in a very pragmatic way. So it's for the bank to get their business model and define where they want to compete. Would the European bank compete against US banks or Asian banks in their own turf in the US and in Asia which kind of competitive advantage do they have? Very little except maybe to bring this client in US and Asia into Europe. So I think European banks need to find their battles basically need to move and need to use their competitive advantage and need to develop and the regulator from my point of view has done what is needed. Basically it's we need more regulation but that's for me very, very clear and less directive to have a more uniform system and to help the banks move forward. What about you, Jose? What do you think could be done in this space? Well, I very much agree with what Jean-Pierre just said and from our perspective I think keeping to global standards in regulation. You know, globally green turn assist standards and Shah mentioned before the implementation of Basel 3 you know, we're supportive obviously of the commission's proposal and we think that's going the right direction precisely because this is one of the key features that allows level playing field in regulation across the world so that then banks can find their own strategies in their own ways to compete in the different markets. So for us, you know, continue to maintain that homogeneity in the application of regulations across the world that apply for large banks particularly is fundamental and this in the context of pressure regulation as the Basel agreements in the context of the new areas in which we're going forward we need to work on that area whether it will be on the ESG front on trying to identify regulation taxonomy there or whether it's in some of the new technologies coming into place that are coming into the financial sector you know, like crypto assets and the MECA proposal that's been put forward by the commission. I think there is important that we continue to keep clarity that a level playing field for regulation but in implementation of global standards and for us to work with the other regulatory agencies of the major financial countries around the world you know, to maintain and upgrade those global standards but maintaining the level playing field is the key role we can play. What about you, John, from the commission side what do you think can be done to make European banks truly global players? Well, I think you have to remember what we're doing here I mean we are providing a framework this is not an exercise and sort of industrial policy on our part so I think what we can do is structure the regulatory framework in such a way and this is repeating what many have said before in order to reduce fragmentation and give scale in the domestic market so to create the European Union ultimately and the European area within the banking union context as the domestic market because what is different I think from some of our players and from US players and Chinese players is that they come with this big domestic market behind them and ours don't. However, is this, here I agree with Jean-Pierre is this what makes big players? No, this is a framework this allows big players to emerge if they wish to emerge, if they can emerge so it's not my job it's not Jose Manuel's job I think to create global players our job is to create a framework which as Jean-Pierre said ensures a level playing field ensures a less fragmented domestic market and then we let the banking system the banking system participants find their way and that's our job done. Right, I actually would like to focus on another theme for the future of European banks this is for the future of every sector really but when it comes to equality I would like to come to you David on this one what do you think could be done to make sure that there's a more equal representation in the banking sector and how could that help integration in the Euro area? I suppose from talking a little as city here I suppose we as a bank operating in over 100 markets around the world with physical presence feel as though on various measures of diversity for example that there's we reflect that and I think with that is also the case within Europe that most people look at diversity as contributing to diversity of thought cognitive diversity amongst other measures and it's certainly been suggested that having broad perspectives avoids a single way of thinking and therefore in times of whether it's whether it's risk-taking whether it's in periods of stress whether it's in just assessing next steps that having a broad representation of people operating within banks is a good thing for achieving that and so I think it comes brought to individual institutions to make sure that they're reflective of the societies and the markets in which they compete that they match the expectation of their customers and clients and indeed their increasingly their regulators with regard to the people they employ but then also the culture that they develop inside their institutions and ultimately employees make their decisions about who they want to work with based on those dimensions so I think it's a it's it's constant work but I would say that for banks tend to be very open and vibrant places with very good careers and jobs and therefore they are positive for attracting time. What do you think on this one Jean-Pierre? Do you think that enough is being made to support a more equal representation across the sector? I think clearly not enough is being made and when you look at the split in terms of gender within the bank of the working population it might appear superficially as more or less balanced but if you go to the upper echelon of a bank I mean the diversity is not sufficient so we need to do more I think banks are very focused on that in terms of ESG you know that in terms of governance but also we have seen actions taken on environment and social responsibility side so banks have to lead by example and I think you know they understand that it is important it's a people's business for a large part so as such it's of critical importance to attract new employees and to retain current employees that they move on this field. What about you John from a legislative point of view how can we fight this inequality in this sector? I think the first point to make is that the banking sector is not unique in this particular challenge I mean this is a challenge which extends beyond banks to the financial sector and beyond the financial sector to the wider economy so you can't just say that this can be something handled uniquely in financial regulation and independently of everything else however whatever is being decided more generally has to be reflected in the financial regulation and what has been mentioned by John Pierre about ESG is very interesting in this regard because this S letter we have always viewed as a certain you know if we think back to the past S meant certain things did not really include equality did not really include diversity I think S going forward so as we start to build social taxonomies and other things the issue of diversity in particular and not just gender diversity but ethnic diversity and the wider concept of diversity I think will become more important and will I think begin to be reflected more in the legislation and if you listen to the conversation in the United States around regulation particularly around market regulation this idea of human capital these ideas around the structure and the quality and variation in human capital is becoming you know and quantitative targets in this context are being discussed so I think there will be a role for regulation but it will not be you know uniquely an issue for financial regulation it will be for regulation across the piece right as we are approaching the end of our session I would like to look at the legacy of the pandemic to the banking sector and we know how big of a landmark the 2008 crisis was and what that meant for regulation in the European Union so Jose when you look at the current crisis at the pandemic what do you expect will be the legacy for the sector from a European perspective well that's a big question for concluding but let me try to be brief if I may you know first on one direction the area of regulation we said that we already can say that the crisis has shown us that a big part of the regulatory framework that was built since 2008 until 2021 COVID started has helped us to manage the crisis from 2020 until today so in that sense you know we can feel comfortable and happy that the work that had been done of the last 10 years was worthwhile to some degree at least because this certainly has proven useful institutional infrastructure that was created in Europe where the EVA is part of the infrastructure that started in 2011 to the regulatory framework that was put for banks so that has been one good aspect the second aspect maybe just to be a little bit more cautious is that we don't know yet what the legacy will be to banks from the damage that the crisis has caused to the economy or the damage that the crisis is causing to the economy if I may because we're still now we're talking about a new wave in many parts of Europe obviously of the COVID so it's still ongoing but even if we were not to continue on going we know that the last year and a half it's been significant disruptions to the productive sector to the economy to many firms as a result of that we also know that the actions taken by monetary and fiscal policies have been very helpful in covering some of that damage but some of the damage will continue to exist so we are constantly calling on banks to remain cautious in assessing what the credit quality of the counterparties are particularly as we go forward as we expect and it should happen the exceptional measures both on the fiscal to the public guarantees and the monetary part put forward by the authorities will start to be removed so I would say you know we need to continue to be cautious on that to try to assess what the impacts will be there What about you Jean-Pierre what do you think will be the big legacy from the pandemic and are you worried that we will see a wave of non-performing loans in the European Union? But I think first of all there are different impacts first an acceleration of the client behavior so that's something which is irreversible and I think banks have made in a year much more progress than in the past five years before the pandemic so that's something which is key the second thing is the unbelievable answer of both the regulator and the government in order to tackle the crisis and the coordination between the regulator and the government was absolutely extraordinary when you look at it and that's probably a lesson for the future and the third is the banks would not have been in such a strong position if we didn't have all the work as I mentioned which had been done after the great financial crisis so we were to a certain extent lucky and I'm not sure it's the right word to use to have been going for the financial crisis to have a very strong banking sector but what is still a bit strange that we have not seen yet the wave of defaults that everybody was expecting the consequence of the actions taken and probably despite the fact that it's an extremely grave medical and social problem I mean the bank balance sheets will be in better shape than what we were expecting thanks to the government support What about you David? Tell us what do you think will be the legacy from the pandemic and I would also like to get your thoughts on the non-performing loans whether do you think this will be an issue for the Euro area in the coming years I'll do the second one first which is that of course banks need to keep a focus on the NPLs but as Jean-Pierre said the levels would not as they were certainly anticipated in the early stage of the crisis in part because of very significant government intervention in economies we'll have to see how the economic recovery plays out inflation is on the agenda that it wasn't in a way even two or three months ago supply chain disruption all those things can lead to a different assessment of credit quality and so on so I think that that movie's not over I think we just need to keep watching that but it's certainly at a position which is was better than anticipated a year ago to me the great legacies will be two one that's already mentioned which is that the operation of the banking system positively as a transmission mechanism for government and supervisory intervention what I think has worked fantastically well in Europe and that is that is a legacy of confidence and operation that should be taken forward and the second is I think it's associated to that which goes to trust so I think whether it's the regulators whether the policy makers or indeed the clients and customers the banking system I think operated well and that trust dividend if you like can be taken forward to the next stage what about you John I know that the European Commission was very happy with the next generation EU funds but do you think that the legacy from the pandemic will be just limited to that big step well I think if we make a success of the NGU then perhaps not but the we must not get ahead of ourselves first things first we must make a success of the NGU so if down the line we see that this money has been used in a way that promotes reform promotes productivity promotes economic growth then you can have that discussion about what's next but let's not jump ahead let's get the job done first in terms of NPLs I think it's right to say there's no tsunami so the tsunami did not appear we now need to watch that there's not however a sort of gradual surge over the years to come as does the measures are gradually withdrawn so maybe not a tsunami but let's be careful and just to be a little bit different I mean of course I agree with all the other speakers on the legacy that we can draw but I think one lesson we do need to draw is that the nature of the crisis we first experienced as I said earlier was different to the one that we experienced in 2008-09 and while we are very happy that the measures we have taken so far did in fact leave the banking system in a much better shape this was not a crisis centered on the financial system and we shouldn't draw too much confidence from this that if the next crisis is one that's centered on the financial system not having the banking union completed not having all these reforms in place could still leave us vulnerable so I'm very happy with the way the banking system performed I'm very happy that the work that the banks and the regulators did in advance contributed to that but just not draw the wrong lesson from it that somehow everything's fine now and we can stop worrying about challenges facing the banking system this would be a mistake I think right and on that note on that key warning I would like to thank all our panelists for joining us today and of course a big thank you as well to our audience for taking part for sending questions we hope you enjoyed the discussion and of course the whole of the ECB forum over the last two days and I'll see you soon