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GlobalOfficialInstitutionsConference,22June2023Buildingtogetherafuture-proofbankingandpaymentsectorinEurope

SpeechbyFran?oisVilleroydeGalhau,

GovernoroftheBanquedeFrance

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LadiesandGentlemen,

IampleasedtobewithyouforthisGlobalOfficialInstitutionsConferenceorganisedbyBNPP,andIextendmywarmestthankstoJeanLemierre,ChairmanofBNPP’sboardofdirectors,forhisinvitationtogivethisspeech.

Facingtheobviousturbulenceandchallengesofthelast18months,wecomeherefromdifferentperspectives.Letmefocusneverthelessonsomecommonfeatures:IwilltaketheEuropeanview,andnotonlytheFrenchone.AndIwillfocusontwodelicateinteractionsbetweenpublicauthoritiesandprivatesectorfinancialinstitutions:

-thefirstoneisabouttherecentpast:whydidtheeuroareaescapethebankingturmoilbornintheUSandinSwitzerland,andcanwebesafeenough?(I)

-thesecondoneisaboutthenextfuture:whyshouldCentralbanksstandreadytoissueadigitalcurrency?(II)

I.Bankingturmoil:threeblessingsandafuneral

IspokeafterSVB’sfailureof‘Threeblessingsandafuneral’.Letmestartwiththefuneral,atleasttheonethatwecanwelcome,butwhich,unfortunately,isnotfinal.Itshouldbethecondemnationandthefuneralofmismanagement.Blatantmismanagementoftherisksandofthebusinessmodelinsomebanksexplainsfirstandforemosttherecentturmoil.Itmustbereiterated,SVB’sbusinessmodelwasfortunatelyanoutlier,andtheriseininterestratesgenerallybenefitsEuropeanbanks,thankstotheirdiversifieddepositbaseandlargeloanportfolio.AspresidentoftheFrenchprudentialauthority,IcanattesttoFrenchbanks’robustness:theirnetbankingincomeincreasedby5.3%in2022,andtheirrevenuesremainonahightrackin2023.

Afterthe(temporary,alas)funeral,letmecometothethreeblessings.Thiswordisabitself-centred,Iconfess,sinceIamreferringtopublicpolicies.ButtheblessingsreferfirsttotworeasonswhytheUSbankingcrisesdidnotaffecttheeuroareathistime:ourregulation,andoursupervision.Asregardsregulation,BaselIIIinitsentiretyappliestoallEuropeanbanks,butonlyto13banksinthe

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UnitedStates.Accordingtoanumberofestimates,includingourown,SVB'sshort-termliquidityratio(LCR),haditbeenapplicable,wouldhavebeenbelowthe100%requirement,whichwouldhavebeenanearlywarningsignal–formemory’ssake,allliquidassetsarebookedatfairmarketvalueinthisratio.ThepriorityisthereforenottokeepreworkingtheBaselrequirements-andthusdelayingtheirimplementation-buttoimplementthemeverywhereandquickly,astheFedViceChair’s–MichaelBarr–reportsuggesteditinApril.Inshort,moreBaselIIInow,ratherthanahypotheticalanddelayedBaselIV.However,therearetwoissuestoconsider:theincreasedspeedofdepositwithdrawals-connectedwithdigitalisationandsocialnetworks-raisesnewchallenges.Noneoftheideasputforwardonthissubjectareclear-cut,butnoneshouldbetaboo.Moreover,thelackofliquidityandtransparencyinthesingle-issuerCDSmarketmustnolongergiverisetosystemicrisks:asafirststep,wemustensureabetterunderstandingofthetransactions,theparticipantsandthecorrelationriskwithotherfinancialinstruments.

Letmenowturntosupervision.WhydidCreditSuissefaildespitemeetingtherequirementsofBaselIII?Theanswerisclear:goodregulationisnecessary;butitisneverenough.AHighwayCode-regulations-,eventhebestoneintheworld,willonlybeeffectiveifthetrafficpolice-supervisors-areefficient.Risksgeneratedbyspecificbusinessmodelsshouldleadtostricterrequirements.Thisispreciselythespiritof"Pillar2"oftheBaselframework.Supervisioncanandmustberesponsive,intrusive-includingwithon-siteinspections-,exercisedbyhighlyqualifiedprofessionals,andappliedforcefully.Thisisnotwishfulthinking:thisactivesupervisionisoneofthegreatestsuccessstoriesofourEuropeanBankingUnion.TheSSMdemonstratesthebenefitsofbringingallplayersunderonemainauthorityonly,ratherthanregionalones,withclearlydefinedresponsibilitiesandcoordination.Furthermore,ouractivesupervisiondemonstratesthestrongvalueofregularstresstests,whicharethisyeartypicallybasedonasharpriseinshortandlong-terminterestrates:thisisthewayweinEuropealreadydealactivelywithIRRBB,includingforsmallerinstitutions.

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Resolutionisthethird‘blessing’,alsolessoperational.ThefactthattheSwissauthoritiesoptedforamergerinthecaseofCreditSuisseraisednewquestionsabouthowtomakeresolutionmorereliable.Letmesharejustsomethoughtsatthispoint.Thefirstconcernstheresolutionoflargeorevensystemicallyimportantbanks.Theprovisionofpotentiallysignificantamountsofliquidityintimesofcrisisisaprerequisiteforsuccessfulresolution.TheframeworkfortheECBtoprovide"Eurosystemresolutionliquidity"hasyettobebuilt.Theotherpriority,attheotherendofthespectrum,istoshiftfromresolution"foraminority"-afartoosmallminorityofcases:twointhelastnineyears-toresolution"forthemajority"ofcases,includingsmallandmedium-sizedbanks.TheEuropeanCommission'sproposalforarevisedcrisismanagementanddepositinsurance(CMDI)frameworkisastepintherightdirection.Yet,level-playingfieldmustbeensurednottogiveunfairadvantagetosmallerbanks;andgreaterpoolingbetweentheResolutionFundanddepositguaranteeschemesshouldnotleadtolargecompaniespotentiallybenefitingfromthesameprotectionasthesmallerdepositsofindividualsorSMEs.

II.Thedigitalcurrencyforachangingworld

Letmenowturntomysecondtopic:thetechnologicalevolutionsunderwayinthefieldsoffinanceandpayments,whichhasledus,theEurosystem,tohavelaunchedaninvestigationphaseonaretailcentralbankdigitalcurrency(CBDC)underthesponsorshipofPresidentChristineLagardeandmyfriendandcolleagueFabioPanetta.PendinganapprovalbytheGoverningCouncil,apreparationphasewillthenstartattheendofthisyear,beforeapotentialandgraduallaunchfrom2027or2028onwards.IamawareIamenteringherealessconsensualground,listeningtobanks’doubtsalongtwoarguments(i)theCBDCwouldbea‘solutioninsearchofaproblem’,the‘why?’question(ii)andtheCBDCwouldbeacompetitortocommercialbankmoney.

Thepurpose:adigitalbanknote

Aboutthe‘why?’,Icanimaginethattwocenturiesago,thereweremanyvoicesquestioningtheneedforapaperbanknote–atthattimeahugetechnicalinnovation–tobeissuedalongthegoodoldgoldandsilvercoins.Today,itall

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boilsdowntoonesimplequestion:aseverythingisbecomingdigital,whyshouldcentralbankmoneybetheonlythingtoremaininpaper?Asmanyofyouknow,centralbankshavealso–andfortunatelyso–innovationintheirDNAi,keepingpacewithtechnologicaldisruptions.TheEurosystemhasmadeheadwayonthedesignofthedigitaleuro,iiincludingthroughregularexchangeswithconsumerassociations,merchantsandfinancialplayers,andthetestingofdedicatedprototypes.iiiToputitinanutshell,thee-eurowillbeadigitalbanknote,or‘Cash+’.Naturally,itwillfeaturethesamecharacteristicsasexistingcash.Notably,itwillensureprivacy,ivwiththeofflinefunctionalityensuringthehighestlevelofconfidentiality;itwillbethesafestofassets;thankstoitslikelylegaltenderstatusv,itwillbeacceptedeverywhereacrosstheeuroarea;anditsbasicfunctionalitieswillbefreeofchargeforindividuals.viBut‘Cash+’,bringingsignificantadvantages

comparedwithbanknotes:itwillalloweachandeveryonetousecentralbankmoneyine-commerce,inremotepeer-to-peerpayments,aswellasforconditionalpayments.Ithinkit’sourdutytobuildthiscapacityforourfellowcitizens,butitwillbetheirfreedomtouseit.ThedigitaleurowillofferEuropeancitizensanadditionaloptioninthewaytheymakepurchasesandtransactions,andtheywilldeterminethepaceofitsdevelopment,andits‘marketshare’.Adigitaleurowillnotreplacephysicalcashorotherformsofmoney,andthisbringsmetothisalleged‘competition’issue.

Moneyisandwillremainapublic-privatepartnership

Foralongtimenow,moneyhasbeenapublic-privatepartnership.Weneedtheskillsofbothsides:theagility,innovations,customerrelationsofcommercialbanks;andthetrustandstabilityguaranteedbyCentralbanks.Yes,digitalcommercialbankmoneyalreadyexists,andisusuallyregardedassafeascentralbankmoney;itwillremainverysignificantinpaymentamounts,andyoumaypossiblydeveloptokeniseddeposits.Butthetrustcommercialbankmoneyinspiresisnotonlyduetoeachbank’sprivatesignature;it’sanchoredbyitsfullequivalenceandpermanentconvertibility,1:1,tothepublicmoneyissuedbythe

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Centralbank.Loosingthispublicanchor–inaworldofdigitalpaymentswithoutCBDC–wouldsoonerorlatermeanunderminingthisprivatetrust;thinkofthe19thcenturyintheUnitedStates,beforetheFed,wheretherewereregularlyconfidencecrises.

Tomakeitcrystal-clear,adigitaleurowillnotleadtodisintermediation.Itwillbedistributedthroughbanks:wecentralbankshaveabsolutelynointentiontoopenprivateaccounts.Inresponsetosomeotherworries,therewillbenofinancialstabilityrisks,duetopossiblesignificantoutflowsfromcommercialbankmoneytocentralbankmoney:aholdinglimitwillapplytodigitaleuroaccounts,anditwillensurethatthedigitaleuroservesasapaymentmeans,morethanasastoreofvalue.

Socommercialbankscanandshouldgetonboardwithfullconfidence.Weare,inthis21stcenturyasinthetwopreviousones,complementaryandnotcompetitorsonmoneyandpayments.Assaid,it’sveryprobablyourdutytoissueaCBDC,butit’sourwilltoissueitwithyou,commercialbanks,andnotagainstyou.

Developingaschemeofsharedbenefitsforallstakeholders

Moregenerally,Iwouldliketoinsistthattherecanbebenefitsforeverystakeholderalongthechain.The‘economicequation’canbeworkedoutsothateachandeveryone–includingbanksandmerchants–hasadirectinterestinbeingpartofit,likeforcashissuancetoday.Wearewellawarethat,toquotethewordsofourhost,paymentshavegonefrombeingasimpleconveniencetoacentralelementofbanks’relationshipswiththeircustomers,andwestronglydesirethatthiswillcontinuetobethecase.

TheEuropeanpaymentecosystemasawholewillalsobenefitfromthedigitaleuro,ratherthangivinggroundtosocalled‘stablecoins’probablyissuedbynon-Europeanplayers.viiTheschemewearecurrentlydevelopingwillenabletheemergenceofopenacceptancestandardsonapan-Europeanscale,fosteringconvergenceandenablingallplayerstobuildfurtherinnovationsoncommonground.Inshort,adigitaleurowillactasa‘platformforinnovation’viii–includingforsolutionsincommercialbankmoney,whichwillbenefitfromtheacceptance

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standardsofthedigitaleuro.LetmestressinthisregardthatforinstancetheEuropeanPaymentInitiative(EPI),whichwestronglysupport,successfullytestedandintegratedthedigitaleuroduringtheprototypingexerciseorganisedbytheEurosystemoverthepastfewmonths.ThissuccessshouldurgeEuropeanbankstojoinbothinitiativesandrelatedworkinggroups.

Inthesamespirit,we–BanquedeFranceandECB–areactivelyworkingwithfinancialinstitutionsonwholesaleCBDC.Oursharedpurposeistwofold: