President of APB on banking and the capital market

Opinion piece by the President of Associação Portuguesa de Bancos (APB - Portuguese Banking Association) published in Diário Económico on 2 July 2015

The banks and the capital market: a common goal
A resilient, diversified, integrated financial market is essential in supporting and stimulating economic growth and the resulting creation of jobs, which are desiderata of the European Union in general and Portugal in particular. Banking in Europe, as in Portugal, is responsible for around 70% of financing to companies. It is therefore absolutely essential for any country to have a strong, solid, modern, trustworthy banking system, as banks are indeed the heart of the economy.

In our case, companies’ over-indebtedness and under-capitalisation are still a serious problem as they hinder their access to bank loans. As a result our main targets must be the restructuring of debt and recapitalisation of businesses.

It is naturally desirable for banking to be complemented by diversification of sources of funding and we should encourage an equity culture in Europe. It is enough to compare Europe to the United States, where the capital market accounts for over 50% of companies’ funding needs.

It is therefore necessary to create, in Europe and in Portugal, a favourable framework for attracting resources and allocating them efficiently, while at the same time granting bank loans and increasing recourse to the capital markets - the stock exchange and investment and pension funds, equity funds and shadow banking in its different forms.

If properly designed, future Banking Union and Capital Market Union will successfully create a union of efficient, integrated financial markets. The focus must be on a complementarity that increases overall funding of the economy and not on the effects of replacing sources of finance.

The banks are facing a new paradigm and considerable challenges, such as the following:

1. In their mission as channels and partners in economic growth, banks are prepared to increase the amount of solvent loans and advances and are interested in doing so, because demand is still low. They are willing to offer their expertise to SMEs so that they can achieve their goals of capitalisation, access to funding or restructuring of debt.
2. The sector’s reputation must be cleared, as it has been deeply affected by the BPN and BES crises, via proactive, consistent action in the creation of a banking culture based on values such as integrity, honesty, ethics and strictness, on demanding corporate governance, on the pursuit of good banking practices and on transparency and clarity in their customer relations.
3. It is necessary to absorb and respond to the new regulatory and Banking Union framework (in terms of resolution and prudential supervision) and new demands in terms of the conduct and governance of financial institutions. It is vital for the regulatory framework and supervisory culture to be not only appropriate to banking, in order to ensure the restoration of investor confidence, but also for them to be manageable. We must assess and reflect on the impact of the vast number of measures (in the form of directives, regulations, decisions, laws, notices) already implemented or in the pipeline, on the economy and the banks’ ability to finance it at a price that is not too costly. The burden on the banks must not be too heavy and the costs must not be too high.
4. The recovery of banks’ profitability is essential to ensure high equity levels and facilitate credit to the economy.
5. It is necessary to take advantage of digital apps in banking not only in payment channels and systems but also in management, processes and automation of functions.