 Let me now introduce our first segment which is a conversation between two eminent persons who you of course all know in the field of European and global finance. May I ask, please, Supervisory Board Chair Andréan Ria and Jacques Delarousier on stage, Jacques Delarousier, former IMF Managing Director, Governor of the Banque de France, and President of the European Bank for Reconstruction and Development. Please come to the stage and take your seats. Like those. Very low seats. Okay, good afternoon to all of you. Good afternoon Jacques. Thanks for being with us today. That's a real treat for me, your presence. You know, during these years, when looking at the challenges I was facing, I was always trying to find some inspiration and I always had basically three masters in my personal Olympus I was looking for and they were, and they still are, Alexandre Lanfaluzzi, Tomasopoulos Kjop and Jacques Delarousier. I mean, they've been always, the persons have been looked at to their writings when I needed inspiration in front of different difficult choices. And Jacques has been, of course, when the EBA was established, we started the dialogue and the friendship that is one of the things that guided me throughout this period. So thank you very much, Jacques, for being here with us today. That's really a big gift for me. And I'm sure it will be the highlight of our event in these days. So let me start with a question. You, with your group, were at the forefront of shaping the response of the European Union to the great financial crisis and to the sovereign debt crisis afterwards in terms of regulatory and supervisory framework. Do you think that the reforms introduced in Europe at that time are enough? Or do you think that the turmoil that we have experienced with the shift, the rapid shift in the interest rate environment recently require additional adjustments and maybe to rethink part of the work that we have done? Yes. Thank you very much, Andrea. Ladies and gentlemen, I'm delighted to be with you this evening. I'm all the more delighted that you have chosen me to preside over this first conversation. And I want to say on the record that I have an enormous amount of esteem and admiration for you for three or four reasons. The first one is that you are extremely competent and hardworking in your field. The second one is that you have a vision. You don't just look at the immediate hurdles, you have a vision. The third thing is that you have a will, a European will, which is something rather scarce at this time. And for those three reasons, you have enormously impressed me. And the fact that you have asked me to chat with you today is a sign of this mutual friendship. So to answer your question, is it enough what you have done on the regular to preside in order to protect the banks against the shocks? I think it is true that the recent interest rate hikes are having a serious impact on the profitability of commercial banks. Even if the Basel regulations address most of the risks, we must not conceal the fact that headwinds are threatening. They are threatening because the application of these prudential rules is far from universal. The IRRBB, quantitative framework to support continuous supervisory assessment of interest rate risk in the banking book, covers the current and prospective risks to earnings and capital coming from adverse movements in interest rates, affecting assets which are not marked to market. But this fundamental part of regulation is not universally applied. This is what you alluded to, Madame Lagarde, a moment ago. The result is that bank holding a large proportion of their long term positions at low interest rates are particularly vulnerable, unless they have internal models for managing and hedging those risks. Unlike Europe, the United States did not adequately incorporate the risk of rising interest rates into its supervisory mechanism. Inexplicably, at least for me, one of the only elements not included in US stress tests were the rise in interest rates. And I haven't yet understood how it could happen. Moreover, in the US, banks with total assets up to 700 billion dollars are still allowed not to deduct from capital unrealized losses of such portfolios. This freedom in the United States is questionable. The recent Basel end game proposal reduces this flexibility to banks below 100 billion dollars total assets. It's not yet enforced, but it's the idea. And that would leave many regional and community banks unprepared for potential liquidity stress. All in all, the IMF has calculated under its, quote, global stress test, unquote, a significant deterioration of common equity ratios over the last months. When enterprises start being affected by higher interest rates for longer, inevitably the quality of credit will deteriorate and non-performing loans will tend to rise. According to the IMF baseline scenario, 215 banks holding 42% of assets would prove weak. Given the importance of weak tail banks, especially mid-sized banks, and a possible contagion to stronger banks, it would seem appropriate to take into account the possible capital losses of such banks in an IMF-type stackflation of a scenario. This would lead to a somewhat more demanding regulatory framework and to a more extensive use of market fair value. These vulnerabilities depend very much on the business models of individual banks and on the stickiness or instability of their depositors. Supervisors cannot, of course, detect at all moments the combination of such numerous factors. But they should, in my view, see to it that they stay alert and are prepared to address at all times the remaining weaknesses of the banking system. So that's how I would answer your first question, my dear friend. Thank you very much, Jacques. And indeed, I must say that I don't know whether I managed to pass this consideration enough to my team here, but one of the learnings of the last period is that the use of market valuations in supervision, usually we don't do that. We tend to look at balance sheet indicators, but when things get rough, generally markets start looking at banks on a market basis. And this can create very, very rapid visual circles in terms of valuations going down, equity prices going down, and these triggering outflows of deposits. We have seen this very much during the spring turmoil. And I think that we as supervisors need to think how to incorporate better also market valuations, market perspectives in our day-to-day supervision. So that's a very good point that I take also from your answer. Another point on which we have discussed a lot in the past, and you helped me in shipping my thinking on that, but the reality has not moved accordingly, is the point of integration in our market. We have seen a lot of progress in the banking union, you realize in the banking union, but we have not seen a lot of progress in moving towards a generally integrated banking market. Markets are still very much segmented along national lines, and no major progress, I must say, has been done during the last years. What are in your view the causes and the implications of this argumentation? Well, first of all, before I answer your question, I would like to say that I was very happy and proud that you took over the first chairmanship of EBA, which is a child of the group that I had the honor to chair put forward. This group did not have the majority needed to move in the direction of a single supervisory mechanism, which eventually was decided a few years after, and I would like here to pay tribute to this unification and to the SSM. Now, to answer your question about banking fragmentation in Europe, and the fact that the home host conflicts have not been resolved, I would like to remind ourselves that the initial objective of a banking union was to eliminate the sovereign bank loop. Banks were too much involved in financing governments, and that led them to supplementary weakness, because the weakness of the state that had to borrow so much was percolating into the banks that were financing those states. So the idea was to reduce this sort of structural weakness, and if I look at the situation, I don't think we have achieved this objective. And we haven't achieved it not because of the banks, but because of the fiscal slippage which has happened in a number of countries, because the budgetary deficits are forcing banks to contribute to finance these deficits. So this sovereign doom loop could even increase in the coming months with quantitative tightening. Secondly, the bad memories, quote-unquote, of the 2007-2008 crisis, particularly in countries like Belgium and Luxembourg, are still vivid. Authorities in host countries are requesting that subsidiaries of large bank groups in their local economies have sufficient capital and liquidity in place locally to cope with crises affecting these groups. So this basically is a problem of confidence, and in my view the essential cause of the compartmentalization that you are denouncing rightly. Now, I am not sure that branching is a realistic solution to this fragmentation problem, especially for retail banks as neither the member states nor the banks themselves seem to be eager to do it. And if that is the case, if large groups are not that interested in getting complete fluidity capital-wise in their locations and implementations locally, then the question is, are we right to insist so much on our side to get this done? It's a question. Now, in my opinion, the creation of the European Deposit Insurance Scheme, the EDIS, would help to solve the problem. But I'm not sure that it would be enough, and what I see is that large banks are not very eager to have an agreement on the EDIS because it costs them a lot of money in terms of contributions, and they are entitled to ask themselves, is it worth putting so much money in a universal system of guaranteeing deposits when we know, it's the bank who says that, when we know that our financial credibility is bigger than that of small banks, and in a way we have to pay our EDUs our profitability for the sake of banks that, in spite of your presence, are perhaps not as securely supervised as they ought to be. So I'm sorry not to respond in perhaps the 100% positive way that you might have expected from me, but I don't think you can make a banking union against part of the banks, a large part of the banks. And when I say the large part of banks, I don't only think of the large groups, I also think of mutual banks. I think of the German situation which these banks are wishing to maintain their international protection schemes, the famous IPS. So should we go against those views and those interests? I'm asking the question, only the determination of the largest countries in the union based itself on better economic convergence and therefore the return of confidence, only that determination of large countries coupled with the will of most banks in these countries would succeed in resolving the current impasse on the issue of banking union. I'm sorry to have been a bit nuanced, a bit negative on some accounts, but I think the banking union is more the reflection of our European inability to advance on large projects in a mutually politically acceptable environment than a purely technical question which is shouldn't we go through branches and things like that. I think it's more profound and I would of course hope that this sort of move in favor of this movement by large countries would appear. But for the time being it is not there and therefore I have to nuance my answer. I have to refrain from taking up some of the problems but I cannot totally. First of all, let's say I see your points and I reflect a lot of the reality that we are confronted with right now. But I tend to believe, first of all if I look at what for instance the US banks or the Swiss banks that have recently moved their business to the euro area after Brexit, most of these banks have adopted exactly a branching structure. So they have integrated all the subsidiaries into the parent company and they are now branching out throughout the single market. So the paradox is that the non-European groups are exploiting the single market to the most and the European banks are not. What is the difference? You touched an important point. The difference is deposits, let's be honest. When I talk to the bankers they tell me, you know, if you go in a country, you do deposit taking, it's more difficult to do that without having a sort of, you know, you are touching more delicate issues and if they perceive that the local authorities are not supporting this branchification they would not be pushing that argument. But I also think that, you know, there is something at this juncture which is dependent on the market environment. With the current valuations, depressed valuations of our banks, of course banks have been all focusing pumping up their profitability, increasing the remuneration to shareholders. They have not really invested in developing their franchise. I still have the hope, and don't kill this hope, please, that tomorrow, you know, when, you know, there will be a more, you know, stable profitability and banks will start asking themselves how to invest in their future, how to develop their franchise. I mean, having a larger domestic market of 500 million savers, I mean, could be something more attractive than developing, you know, retail shops in different member states. I think that could be value for their own business in doing exactly that. But again, I mean, I agree with you. And by the way, on the issue of the cooperatives, savings banks, especially the Germans, I've never understood why you can, I mean, I've never seen any proposal coming from our colleagues in Brussels that has proposed a dismantlement of the institutional protection schemes of cooperative and savings banks. I mean, we are always very supportive of these schemes. They can very well survive in a complete banking union. But I know, I mean, but the point that you raise are relevant. I mean, these are the political sensitivities that still put sense in the wheel of the process. May I just say that what you have just stated a few minutes ago is absolutely perfect. I mean, intellectually and action oriented. It's perfect. I agree fully. But the reality today is that it's very difficult to launch this thing without more support from the big players. I understand that. I understand that. So, okay. Now, one of the important points that were actually in your report, in the report of your group, back in 2010, if I remember well, was the creation of an integrated microprudential supervision and of a European macroprudential supervision, macroprudential policy. Do you think that we have the right framework right now for addressing systemic risk in the banking union, in the European markets and for smooth interaction between the microprudential and the macroprudential dimensions? Yes. This is a point that touches my heart because when we issued the report in the early months of 2009 on the improvement of the regulatory and the supervisory system for banks in Europe, we touched on macroprudential risks and ways to cope with them. It was one of the legacies of L'Enfalluste, who had developed, I think, amongst the first, the importance of macroprudential actions. And we made a proposal in this report, which was to create a body called the ESRB, which was a body within the ECB that was supposed to alert countries, authorities, public on the macroeconomic risks that were looming. And I must say that this construction that we proposed and which was adopted eventually by the council and the commission and the parliament have not lived up to our expectations. I have stressed this many times in front of the commission, which asked me to elaborate a bit further on his ESRB system. In my opinion, with hindsight now, I think the macroprudential council would have been more effective if it had been separate from the ECB. I'm sorry to say that in this August building, but I think if it had been separated from the ECB and if it had had a broader composition with practitioners, theoretical people, but also technicians, academics, it would have shown perhaps more accuracy in its feelings and more independence. Because to say the truth, the big crises that have happened since the creation of that body have neither been predicted nor even felt or sensed by that council. And I think that that inefficiency, to say the least, should be sanctioned by a change in the body. Now, I'm sorry for the bluntness of my remarks, but it's only a repetition of what I have already said over the last years. Finally, you have never asked me that question, but I'm going to raise it. The development of what we call non-banks in recent years should continue to concern us. The role in financing the European economy has doubled since 2008. So it's not a sympathetic little problem that we have on our minds and we just think of something else just afterwards. It's something that is fundamental. It's half the financing of what the banks finance in Europe, which is enormous because the markets are much less potent in Europe than they are in the United States. So if you look at it statistically, the non-bank intrusion in our economy is much higher than it is in a country like the United States. And still, nothing happens. Much bit are regulations, but it's not regulated like the banking system. And I think that the repercussions of possible defaults would affect, of course, the banks which are the main creditors of those non-banking institutions. And therefore, if it was only for the contagious problem, I would be anxious. But it's much smaller than the contagious problem because their deficiencies or failures could have very serious repercussions on the non-banking sectors also. So I think it's a problem since we have the privilege of talking freely today. I think it's something that your successors, Madame Lagarde, should look at because I have been accustomed since 2007-2008 to say, A, it's very important, B, we're going to work on it and see nothing happens. So say it again. Thank you very much, Jacques. I think our time is over. I don't think that anybody can say that we invite you here to flatter us with compliments, of course. But I think that your critical remarks and your also knowledge of the real obstacles that we are confronted with and the challenges we are confronted with is something that keeps us on our toes and reminds us of the difficult challenges we have. Also this issue of non-banking financial institutions is something that the ECB has been raising for a long while. It's a big challenge. And of course we in the banking supervision side have tried to do our best to make sure that what is the interface between the banks and bank financial institutions is well safeguarded, well overseen. But that indeed is a challenge and you are right in reminding us that alerts have been raised since a long while and unfortunately the willingness to move forward with greater ambition in terms of deploying regulation and supervision in this sector has not succeeded. Anyway, thank you very much Jacques for your time with us, for your wisdom and for your continued sharpness and contribution to our debate. I really enjoyed the conversation and I'm sure all our audience here did as well. Thank you. Thank you very much.