1. “A global financial system for a global economy”
4th International Banking Conference, 18 October 2011
Emilio Botín, Chairman, Banco Santander
INTRODUCTION
Ladies and gentlemen,
I would like to thank you all - authorities, financial sector representatives,
analysts, and academics – for attending this 4th International Banking
Conference.
The first edition of this Conference took place three years ago and just one
month after the failure of Lehman Brothers. Since then, there have been several
important advances both in terms of identifying the underlying problems that led
to the crisis and also in proposing potential solutions. However, despite this, we
cannot lose sight of the fact that global confidence continues to remain low, and
market uncertainty remains high.
To talk us to about these issues, we are honoured to have with us today several
leading players in the debate on international regulation, including:
 Andrea Enria, Chairman of the European Banking Authority
 Joaquín Almunia, Vice President of the European Commission and
Commissioner responsible for Competition,
 Elena Salgado, Vice-President and Minister for the Economy of Spain,
 José Viñals, IMF Financial Counselor and Director of the Monetary and
Capital Markets Department,
 Norman Chan, Executive Director of the Hong Kong Monetary Authority,
as well as
 important representatives from regulatory and supervisory bodies and
national and international institutions.
I would like to express my thanks to all of them for being with us today.
This crisis reminds us of a number of things:
 cycles are not a thing of the past
 liquidity is not always abundant and cheap, and at times it can even
disappear
 financial products help to spread and diversify risk, but they do not eliminate
it completely
Emilio Botín. 4th International Banking Conference 1
Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

2.  we live in an interconnected economy that requires the co-ordination of
economic and financial policies, as well as intense and on-going supervision
of global imbalances.
 The Eurozone requires greater political and monetary integration in order to
ensure the stability of the euro.
At the G20 summit in the autumn of 2008, world leaders were aware of all of
these issues, when they undertook to tackle the problems that brought us to this
crisis.
The measures agreed included significant reforms to banking sector regulation,
as well as the strengthening of financial supervision and governance, and the
co-ordination of economic policies at the international level. All of those steps
are key components in ensuring the recovery and stability of the financial
system, as well as the economy as a whole.
Today, I would like to talk to you about three things:
1. Firstly, about the steps that have been taken to reform financial
regulation. Important advances have been made, in particular in the
field of capital and liquidity standards and in the development of
frameworks for the management and resolution of banking crises. Levels
of capital and liquidity in the global financial system are currently far
higher than they were at the start of the crisis;
2. Secondly, about the importance of concentrating efforts on the
implementation of agreed measures. Now is the time to apply the
brakes to additional regulation and to assess the impact of the
measures that have already been implemented; and
3. Finally, concerning what we feel remains to be done in relation to world
economic governance. In particular, I will refer to the European
sovereign debt crisis as well as the recent proposal to recapitalise the
banking sector.
1. Financial regulation reform
Since the start of the crisis, international regulators and financial entities alike
have worked intensively to take decisive steps towards building a more stable
financial system.
At the next meeting of G-20 leaders, agreement is expected with regard to:
identifying and dealing with systemic entities, and frameworks for the effective
resolution of banking crises.
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

3. Systemic institutions
Much progress has been made in relation to the the Basel Committee’s
proposal to identify and deal with systemic entities. Significantly, the proposal
now recognises that size is not the only variable that determines systemic risk
and that in fact, complexity and interconnection between entities are also
important elements of systemic risk.
Crisis prevention and resolution
The second area where we are anticipating agreement at the next G20
summary is on frameworks for prevention and orderly failure during banking
crises. It is fundamental that any institution should be able to fail, in such a
way that it can leave the market without generating systemic risk and without
the need for recourse to public funds.
Putting together feasibility and contingency plans, the so-called living wills, is a
very valuable exercise - both for entities and for supervisors. Such plans will
enable an assessment to be made about the capacity for resistance and
responsiveness of these entities in the event of a crisis. They will also provide
guidance to the crucial decisions being made by entities and supervisors at
various moments during the crisis.
Banco Santander was the first bank to deliver a living will to its Central Bank - in
April last year. We were able to do so thanks to the simplicity and transparency
of our business model, and to the structure of our subsidiaries that are
autonomous in terms of capital and liquidity.
The crisis has shown that subsidiary models – such as those used by Banco
Santander – allow for:
- an effective assignment of incentives to local administrative teams on a
day-to-day basis, which have to independently obtain financing and
capital for their activities, as well as put in place systems of solid
corporate governance, and
- very clear firebreaks in the event of crisis, limiting the contagion of
financial problems between the various entities within international
groups;
- greater capital flexibility at the group level by requiring subsidiaries to
have independent capital quoted on the stock exchange.
Basel III
In addition to these two aspects of regulation which are already well in hand for
the next G-20 summit in Cannes, I would now like to briefly refer to Basel III, a
reform that was agreed three years ago and covers the international standards
of capital and liquidity.
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

4. From the outset, Banco Santander has supported the broad elements of this
reform, in particular:
 the standardisation of capital requirements at the international level,
and
 the intention for entities to have stable sources of financing to support
their activities.
However, there still remain two questions that we believe are extremely
important to address:
- firstly, the wide international disparity in computing risk weighted
assets
Basel III implies a qualitative leap in terms of ensuring the homogeneity of
instruments for computing capital. However, that same impulse is not being
given to improving transparency in the computation of risk-weighted assets.
This is a vital step in making it possible to differentiate between the levels of risk
and solvency of various entities.
There are still great differences between the computation of risk-weighted
assets between countries, which cause harm to entities with large capital
holdings and low-risk business models, such as Banco Santander, amongst
others
- the second relevant issue that remains unresolved is the definition of
liquidity ratios.
As they are defined at the moment, they:
 damage retail banking;
 introduce significant risks of a contraction of credit portfolios, and
 in some cases, constrain the banking sector’s maturity transformation
role.
2. Challenges
As regards the implementation of the entire regulatory reform agenda,
there are three risks that call for special attention:
1. the risk of fragmentation of the financial system
2. the risk of strangling economic growth, and
3. the risk of failing to sufficiently strengthen supervision.
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

5. The risk of fragmentation refers to the requirements – over and above what
was agreed internationally - that some countries are starting to impose
unilaterally on entities within their jurisdiction.
In our opinion, priority must be given to implementing the new global rules in a
co-ordinated and homogeneous manner, before adding new layers of local
regulation.
A clear example of a positive effort that has been made to reach a greater level
of regulatory and supervisory co-ordination between countries is the
implementation of the new European Banking Authority. We are very lucky to
have Andrea Enria, Chairman of the EBA, with us today. I´m sure he will share
his views with us on these issues.
The European Banking Authority’s work is key to delivering objectives like
the drafting of a single rule book to guarantee the harmonised implementation
of standards across Europe.
The risk of fragmenting the system through significant regulatory variations at
the national level may particularly disadvantage the European financial sector
when compared to other areas or countries, such as the US. In this respect, a
good example is the proposal to set up a levy on financial transactions only in
Europe.
I know that the Independent Commission on Banking (ICB) in the United
Kingdom has discussed at length the impact that its proposals may have on the
British financial system and its relationship with the international system.
In that sense, I will be greatly interested to hear what our British representatives
may have to say today, in particular: Tom Scholar from the British Treasury; Bill
Winters from the Independent Banking Commission, and Andrew Haldane from
the Bank of England. I should like to thank them for taking the time out of their
busy schedules to be with us today.
The second risk that we face is endangering the capacity for a recovery in
the world economy.
I said last year that there is no healthy economy without healthy banks.
Bank play a fundamental role in: financial intermediation, channelling capital
from savers to the most profitable investment projects, and managing and
protecting the system of payments.
To that end, it is essential that the new standards should not harm retail banks.
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

6. By taking deposits and granting loans, retail banking is a key engine of
economic growth.
Finally, we run the risk of not giving concrete form to the measures that are
needed to provide supervision that is:
 intensive
 pro-active
 anticipatory, and
 that covers possible differences in regulation.
I have said many times that no amount of regulation can compensate for
poor supervision.
Although it seems that we are all in agreement as to the importance of proper
supervision, I feel that we ought to go even further in:
 giving concrete form to principles
 defining requirements, and
 taking the measures that a needed to ensure effective supervision.
We have with us today the person who led the proposal on reforming the
European supervisory framework, Jacques de Larosière. I am in complete
agreement when he says that:
The quality of supervision and the risk of expansion of shadow banking are
decisive aspects to complete regulatory reforms in a satisfactory manner.
3. Brake on regulation
Ladies and gentlemen,
The international financial sector needs time to adjust to the important changes
that are in hand.
We cannot continue to have new burdens placed on the sector, such as
new local taxes or requirements of various types.
As I shall say later, neither is it a good time, after spending the last three
years in designing a new regulatory framework that has yet to be
implemented, to launch new proposals on capital ratios in Europe that
would give rise to instability and uncertainty.
Now is the time to take a break in the regulatory processes, in order to:
 IMPLEMENT the reforms that are under way
 MEASURE the cumulative impact of those reforms on the economy, and
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

7.  REINFORCE supervision.
In any case, it is important to remember that to resolve all the problems that
currently affect the financial sector and the world economy, it is not enough to
embark upon reforms and take measures only in the banking sector.
This brings me to the following thought for today: there are significant reforms
pending in other areas separate from financial regulation – in particular, I
refer to the European sovereign debt crisis.
4. Reforms beyond the banking sector
In response to the crisis three years ago, the international community – led by
the G20 – set to work on coordinated solutions and on creating an institutional
and political framework that would guarantee stable growth in the future. That
meant coordination of macro-economic policies as well as banking regulation.
As we have seen, regulatory changes have been many in number, but the
same is not true of advances in the design of a framework of stable, co-
ordinated macro-economic policies.
A few advances have been made: Strengthening the governance of the
international economy by setting up new bodies and boosting some of the
existing ones, and increasing the weight of emerging markets in line with their
growing share of world GDP.
Some good examples are:
 institutionalising the G-20 as a forum for taking global economic
decisions
 setting up the Financial Stability Board (FSB) to develop policies and
measures to foster international financial stability, and
 strengthening the International Monetary Fund and the Basel Committee
as basic organs for the world economic and regulatory system.
However, if we wish to restore confidence in the markets, we must ensure
that the new international financial architecture can anticipate risks and take
corrective measures.
To that end, it is necessary:
 firstly, to reinforce the quality and homogeneity of financial supervision,
not just at a microprudential level but laos the macroprudential, so that it
covers the system as a whole and from an overall perspective, and
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

8.  secondly, it is essential to ensure effective international coordination for
macro-economic policies including:
o the possibility of reaching binding long-term agreements that aim
to guarantee greater economic stability, and
o mechanisms to monitor compliance with those agreements, and to
penalise non-compliance.
In that sense, the Eurozone in particular has its own challenges, to which
the only way forward, in our opinion, is:
more political and economic integration.
European leaders have been very clear: there is no going back on the euro.
I am confident that Europe will find the route to a stable, strong, and prosperous
Eurozone.
We view very positively some steps that have been taken recently, for example:
 constitutional changes to introduce structural ceilings on deficits and
public debt, and
 the approval given in all countries to the plan to strengthen the European
Financial Stability Fund, which will play a fundamental role in resolving
not only problems of solvency but also liquidity amongst Member States.
Today, however, the priority must be to resolve the sovereign debt
crisis.
5. Conclusions
I shall give you my opinion from the perspective of a Group that has a very
limited position in European public debt and a strong capital base.
We need to attack the root of the problem: The sustainability of the euro
and of the eurozone.
Now is the time to turn to action and adopt decisive measures to strengthen
the institutional design of the euro, as well as to ensure a greater degree of co-
ordination between economic policies in the eurozone.
Only when that matter has been resolved:
 will confidence be restored
 will credit begin to flow again, and
 will it be possible to ensure the recovery of European economies.
Over the last few days, various proposals have been put forward to recapitalise
European banks.
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Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011

9. Casting doubt in a general manner on the sustainability of public debt or of the
European financial system may bring us to a ceaseless downward spiral of
sovereign debt and banking crises.
It is possible that some institutions that are particularly affected by the Greek
public-debt crisis, or by the market-debt crisis in general, may require more
capital. However, there should not be obligatory, indiscriminate
recapitalisation of European banks sector without resolving the problem
of public debt once and for all.
In summary, I feel that these proposals make no sense for the following
reasons:
 they undermine what has been decided under Basel III in recent
years,
 they invalidate the stress test carried out by the European Banking
Authority just three months ago, and that took stock of the capital
requirements of certain European banks
 they create insecurity and confusion
 they increase market uncertainty, and, finally
 they will produce a contraction of credit, since many institutions will
opt to reduce their balances.
In sum, any capitalisation of European banks will not restore confidence and
economic growth if it is not PRECEDED BY a final resolution of the sovereign
debt problem.
Thank you.
Emilio Botín. 4th International Banking Conference 9
Grupo Santander City, Boadilla del Monte, Madrid – 18 October 2011