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SpanishInterview with Pedro Guerrero Meseguer, Economic and Financial Consellor at the Permanent Representation of Spain to the EU
In this edition of SFF Magazine, we have the pleasure of interviewing Pedro Guerrero Meseguer, Economic and Financial Counsellor at the Permanent Representation of Spain to the European Union (Representación Permanente de España ante la Unión Europea – REPER). A timely conversation as the Spanish Presidency of the Council of the EU starts in July.
Pedro studied Economics at Buckingham University, England and has been a Trade Expert and Spanish State Economist since 2009. Most of his career has been linked with the Ministry of Economy in Spain, principally in economic policy, as well as financial matters and macroeconomics.
He has been based at REPER in Brussels for 5 years. Most of his work is focused on negotiating European regulations relating to the financial sector, in particular banking, insurance, payment services and digital finance.
"The job at REPER is possibly one of the most interesting that the General State Administration has to offer. One must have a good technical knowledge of the subject matter, but it is also essential to know the dynamics of the different institutions and how they work. The Council, the Parliament and the European Commission all have their own operating rules, in both formal procedures and informal practices"
Pedro Guerrero Meseguer
Economic and Financial Consellor at REPER
REPER is a key organisation that protects Spain’s interests within the European Union framework. To paint a clearer picture for our readers, can you briefly describe its internal organisation and the functions that are attributed to it?
REPER is akin to the ‘Spanish Embassy’ to the European Union. The only nuance is that the term “Permanent Representation” is used when the representation is from an international organisation rather than a country. REPER is headed by the Ambassador Permanent Representative, Marcos Alonso, and is staffed by officials from various ministries.
REPER protects Spanish interests within European institutions and carries out its Government’s instructions in this regard. Daily activity is focused on the Council of the European Union which, via 10 different groups, brings together the ministers of each Member State. For example, in economic and financial matters, the ECOFIN Council, where Economy and Finance ministers meet monthly, is the competent body. To prepare ECOFIN matters, there are multiple working groups at various levels, with ambassadors and advisors representing their ministries.
But REPER’s work must have a holistic approach and Spanish interests in the other institutions, especially in the Commission and the European Parliament, should also be clarified. The Commission presents proposals for laws and other actions of European scope, but it is the Council and the Parliament, as co-legislators, which decide the final outcome. Hence the well-known saying “the Commission proposes and the Council (and the Parliament) disposes“.
“REPER protects Spanish interests within European institutions and carries out its Government’s instructions in this regard.”
In the second half of this year, Spain will take over the Presidency of the Council of the European Union. What are the current priorities on the European economic/financial agenda?
The Spanish presidency will undoubtedly be marked by the international economic scenario, the invasion of Ukraine and trade tensions between major powers. And all this in the context of high inflation and interest rate increases by several central banks. It will also be a closing presidency, given that in June next year the current legislative cycle will end, and a new Parliament and a new Commission will be elected. Therefore, we will have to finalise a significant number of ongoing negotiations, as well as new proposals yet to be published by the Commission. All these factors make it a challenge, but also a great opportunity to give our all and do our bit in the development of the European project.
Regarding Spain’s priorities in the economic and financial area, I understand that this is an important issue and one that arouses interest in the media but, in accordance with protocol, they will be presented in due time by Vice-President Calviño. Generically, the priority will be to create new economic governance to promote strategic autonomy as well as green transition and digital transformation.
We will have important dossiers on the table, such as the financial support package for Ukraine, the review of the Stability and Growth Pact and various budgetary and fiscal measures. On the purely financial side, there are multiple initiatives to strengthen the Capital Markets Union, as well as a Commission agenda for sustainable finance, the implementation of Basel III standards in the banking sector, the review of the regulatory framework for bank crisis management, a package on the prevention of anti-money laundering and terrorist financing, and the digital euro proposal, just to list a few. Major non-legislative issues will also need to be addressed, such as those related to the war in Ukraine or recovery and resilience plans. We are also likely to face unexpected situations that we will need to resolve quickly and efficiently.
Uncertainty has spread in the financial sector following the recent events at international level triggered by several U.S. banks and Credit Suisse in Europe. Do you consider that Spanish banks, and the European financial sector in general, have shown a high resilience to these instability events?
The collapse of Silicon Valley Bank in March was the first of the recent banking crises in the US and possibly the most representative. It is a case of poor management of interest rate and liquidity risks, as well as poor corporate governance because the bank’s management did not know how to detect these risks. Moreover, in the U.S. these types of institutions do not have to comply with Basel international prudential banking standards, an issue that is being analysed by the International Monetary Fund under its Financial Sector Assessment Program. The lax supervision of these types of entities is another reason why it was not possible to identify the accumulation of risks. On a positive note, both the Federal Reserve and the FDIC (Federal Deposit Insurance Corporation) took strong measures to alleviate the crisis of confidence and protect depositors, given that deposit leakage and financial contagion are nowadays much faster than in the past. There is no doubt that digitalisation allows innumerable efficiencies which can be very positive, but it also facilitates, with a click of a button, the massive movement of deposits without the need to queue at the door of the branches. And today, social networks can accelerate and intensify volatility and uncertainty.
The case of Credit Suisse raises different questions. It is a large bank considered “globally systemic” by the Financial Stability Board (FSB). The bank had been experiencing significant business model and corporate governance problems for years. It carried out risky asset operations and made important mistakes in the management of its clients’ assets. In addition, the entity has faced serious money laundering scandals, corruption, tax evasion and even corporate espionage. Although on paper it complied with all capital and liquidity ratios, there had been negative signals in the market for some time, so the uncertainty derived from the failures of SVB and Signature Bank, led to a significant outflow of deposits that, in just one week, forced the sale of portfolios at a loss and the merger with UBS. It should be noted that this merger had to be accompanied by some 9 billion Swiss francs (€1 = approx. CHF 0.97) in public guarantees against possible legal risks, as well as a liquidity line of more than 100 billion from the central bank. Although the amortisation of CoCos in the merger is being highly questioned and the granting of public guarantees is being strongly criticised by parliament and the public, the significant liquidity provision by the Swiss central bank through the establishment of a public backstop is also of interest.
These events are very different from the situation with European banks, which are well capitalised, well supervised and mostly comply with strict accounting standards. All this helps to explain why, despite some volatility in the European Union markets, the sector is proving resilient and there is no loss of confidence in the institutions.
Regarding Spanish banks, I would highlight two things. Firstly, that they are among those that cope best with the adverse scenario contemplated in the European Banking Authority’s stress tests. Secondly, that the appointments of executive directors and board members must be submitted to one of the most rigorous selection processes for suitability within the European Union, both by the institutions themselves and by the overseers.
Regarding Spanish banks, I would highlight two things. Firstly, that they are among those that cope best with the adverse scenario contemplated in the European Banking Authority’s stress tests. Secondly, that the appointments of executive directors and board members must be submitted to one of the most rigorous selection processes for suitability within the European Union, both by the institutions themselves and by the overseers.
All this is a guarantee and is the result of the intense regulatory and supervisory reforms that have taken place since the financial crisis, as well as better risk management by institutions. There is no doubt that we in the European Union have learned the lessons of the financial crisis. Prudential and accounting standards have been strengthened. Banking supervision has been improved and a single supervisor for the main eurozone institutions, the Single Supervisory Mechanism, has been created. A Single Bank Resolution Mechanism has been created which, although it can be improved, obliges institutions to considerably increase their capacity to cope with losses without requiring public aid.
But we must not become complacent and think that all the work has been done. For example, we are currently finalising negotiations on the banking package that will implement the Basel III prudential standards, strengthen bank governance criteria (Fit and Proper) and more strictly regulate branches of third country entities. In my opinion, it is desirable to regulate these third country branches in a harmonised manner to ensure that banking problems in other parts of the world do not directly harm European citizens.
In your opinion, what are the main challenges facing the European financial sector in the medium and long term?
From the regulator’s point of view, it is essential to complete the Banking Union. It would be a serious mistake to trip over the same stone twice and not complete this important project until we are once more faced with a major financial crisis.
Therefore, we must improve banking crisis management, so that resolution procedures with sufficient industry funding are the norm. This would avoid having to use public money, which is costly for the taxpayer, has poor social acceptance and its use can be questioned and hindered by national parliaments. Moreover, experience shows that in resolution processes, especially for institutions of a certain size, it is essential to have strong liquidity lines from the central bank. A scheme should be created so that the ECB can provide liquidity in resolution with a public backstop, either the guarantee of the European Stability Mechanism or the guarantee of the Member States through joint debt issuance by the Commission.
“We must improve banking crisis management, so that resolution procedures with sufficient industry funding are the norm.”
The Eurozone should also have a European Deposit Guarantee Fund, EDIS, as soon as possible, which would cover all depositors equally. In times of financial volatility and uncertainty, EDIS would help to maintain greater depositor confidence. As mentioned above, the SVB and Credit Suisse cases show that deposit withdrawals in the face of bank panics are very rapid today, making this issue more important.
It is also necessary to achieve a greater degree of financial integration that will effectively allow us to speak of a European Financial Sector. Currently, levels of financial fragmentation are very high, both in banking and in capital markets, leading to an inefficient allocation of savings and investment. There is little incentive for cross-border bank mergers, as current regulations limit the synergies and efficiencies that could be achieved. And non-bank financing needs to be further developed, to introduce competition in financial markets, to reduce dependence on bank financing and to enable better financing of projects with a highly intangible component. In other words, the Capital Markets Union must be deepened faster and more intensively.
One last point on the regulatory side. There are countries in the Union that could make greater efforts to improve their banking systems. Although this is not an issue that should be of concern from the point of view of confidence and credibility in banks in general at the present time, it would result in better financing for families and companies, as well as greater solidity in the system. The reforms carried out in Spain after the financial crisis, such as the reform of the savings banks, improvements in corporate governance or the appropriate reorganisation of institutions, are clear examples of the type of measures that could be adopted in some countries.
The sector is facing increasing competitive pressure from new players, highly digitised and with a high capacity to exploit the data economy. Increasing competition from large internet platforms and the emergence of new business models in areas previously considered to be mature, such as payments and lending, are undoubtedly positive for the banking customer and for society. But they present a growing challenge for the banking sector, which must better digitise, gain efficiency and improve its products and services to ensure customer loyalty.
Another important structural challenge is that Europe should achieve higher and more sustainable GDP growth rates in the medium and long term. A stronger, more innovative economy, creating jobs with higher added value, will result in a more dynamic and robust financial sector. The green transition and the digital transformation must be important axes for the revival of the European economy, but they should not be the only ones.
And we should not forget that the strength of public finances also has an impact on the funding costs of banks, especially those medium-sized and small institutions that are less internationalised. For example, the placement of subordinated debt or MREL-eligible instruments for medium-sized banks will be more expensive, which will reduce their profitability and, consequently, their ability to strengthen their top-quality capital base.
From a conjunctural point of view, the main challenge will be the new economic and geopolitical environment. We have come from a decade of zero or negative rates and that was an exception that is now being corrected. Inflation and interest rates have increased significantly in recent times. This is a consequence of a context marked by the breakdown of value chains following the pandemic, various changes in the labour market and Russia’s invasion of Ukraine and its impact on the price of raw materials and energy. With respect to Spain, we must be prepared for the moment when the new fiscal rules come into force, foreseeably in 2025, given that we will surely be required to make certain structural fiscal adjustments in a context of higher interest rates.
Undoubtedly, understanding these vulnerabilities and taking decisions to correct them will be essential to achieve a sounder, more efficient financial system that contributes more to the economic and social development of Spain and Europe.
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