“Solutions for growth and stability” Fifth Banco Santander International Banking Conference

1. “Solutions for growth and stability”
Fifth Banco Santander International Banking Conference
14 November 2012
Santander Group City
Remarks by Mr. Emilio Botín
Good morning.
Welcome to Santander Group City.
I would like to thank the authorities, financial sector representatives, analysts, and
academics for attending the Fifth Banco Santander International Banking
Conference.
I would especially like to thank Luis de Guindos, Minister of Economy and
Competitiveness, who is accompanying me at this opening, as well as the rest of the
speakers.
I am delighted to share with you my views on the current situation and the outlook for
the international banking sector.
Though conditions continue to be difficult, especially in Spain, you will have noticed,
from the name of this conference, that we believe the time has come to look to the
future and examine solutions for growth and stability.
To this end, today I want to speak less about the crisis, and focus instead on
Europe and on banking, a sector which, by its very nature, is at the heart of
economic activity.
Thus, my speech will address:
- the importance of the European project;
- the key role that banking and the financial sector must play in resolving the
issues facing the Union; and
- the need for a good banking culture.
1. EUROPE
First of all, Europe.
Europe is the foundation upon which Western society as we know it today has
developed. For centuries it has been the cultural, intellectual, and economic centre of
the world.
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2. Many of the major ideas, political systems, technological, social and economic
advances that exist today emerged from Europe: democrac, universities, the
Enlightenment, the Renaissance, the Industrial Revolution, the nation state, the
separation of powers, the rule of law, the welfare state and many others.
This legacy, in itself, explains the role that Europe must continue to play on the world
stage: a stage on which Europe represents more than its constituent nations. The
world is now organised into large blocks (the United States, Latin America, Asia), and
you need to be big in order to compete.
Sixty-one years ago, Europe knew that it had to unite if it was to have a significant
place in the world.
Europe has been strongest and most prosperous when it is united.
Never before had Europeans experienced a longer period of prosperity than the one
which followed the Treaty of Paris and paved the way for the euro. This process had
three outstanding features: it was long, difficult and required clear leadership.
Long because Europe could not be built overnight. The Schuman Declaration held
that “Europe will not be built all at once, or according to a single plan.”
Difficult because it had to balance different interests, which it managed by
combining hard work, generosity and imagination.
The treaty that created the European Coal and Steel Community signed in Paris in
1951, was printed by a French printing press, on Dutch paper with German ink. It
was bound by Belgians and Luxembourgers and stitched with Italian silk. It is a good
example of how individual interests were pooled to benefit the common good.
The Treaty also reflects the way in which the European project was made
possible by the vision and leadership of its statesmen.
In his memoirs, Konrad Adenauer, Chancellor of the Federal Republic of Germany
following the Second World War and one of the founding fathers of Europe, recalls
his surprise when, on the morning of May 9, 1950, he received the proposal from
French Commissioner, Jean Monnet, to pool German and French interests in coal
and steel. This paved the way for the creation of the European Economic
Community.
Thanks to the leadership, drive, and determination of these two historic figures, the
proposal received the support of the French and German cabinets in only a matter of
hours, and Belgium, Italy, Luxembourg and the Netherlands were included in the final
declaration.
That is how the European community was born. Ever since, Europe has
positively surprised the world on other occasions. The best example is the
euro.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 2

3. Monetary union required considerable transfers of sovereignty from its member
states, which prompted a major debate. Nevertheless, in 1999, eleven countries
adopted the euro as a single currency and the European Central Bank was formed.
Europe had taken a step forward, abandoning a clearly unstable system of floating
exchange rates.
Few believed we were capable of implementing such a technically, economically and
politically complex project.
The benefits of the euro have been immense. It is the only currency capable of
competing with the dollar as a reserve currency.
In macroeconomic terms, it has led to increased trade flows, more investment, and
greater competition. In the business field it has brought: improved efficiency,
increased competitiveness and economies of scale, among other things.
For Banco Santander, as for other major European companies, the euro has been a
key factor in our growth over the last fifteen years and has given us access to new
markets and opportunities.
The euro ushered in a decade of enormous prosperity.
However, when the international crisis reached Europe, we lacked the tools to
provide a rapid response.
We should reflect on the fact that a financial crisis that originated in the US, and
spread worldwide, struck Europe more severely than any other economic area.
While most regions have managed to emerge from the crisis, or are in the process of
doing so, we are taking far too long.
We have lacked the determination needed to confront the first major crisis
since the birth of the euro.
The lack of a roadmap to deal with crises and of the conviction of belonging to a
common, irreversible project, have resulted in insufficient measures, implemented
too slowly and with highly uncertain results.
Europe’s response has not matched the severity of the economic situation and it has
triggered a wave of disaffection towards Europe from its own citizens, who expect
leadership and solutions.
We now face the tremendous task of inspiring younger generations, who have no
experience of a divided Europe, to wholeheartedly defend and strengthen what we
have built over the years.
The European summit of heads of state and government last June and the
measures approved by the ECB in September represent a change of direction
and clearly mark the way out of the crisis.
The priority now is to carry out the agreed plan.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 3

4. Europe is the cornerstone of Western society, but if we do not act with speed
and determination, we run the risk of being swept into decline.
Let me give you some data.
• Today, the eurozone has 330 million inhabitants. In just eight years time, in
2020, Brazil and Mexico will have a bigger population than the 17 eurozone
countries combined.
• The International Monetary Fund estimates that in the next six years the
eurozone’s GDP will slip five points from the current 19% of the world
economy to 14%. In the same period, the United States is expected to remain
at 21%.
We all know what is at stake. There is no turning back from the euro and the
integration of Europe. They are absolutely essential.
It is the best approach. There is no Plan B.
At Banco Santander, we are convinced that the eurozone will not break up. The
institutions of the European Union are firmly committed to consolidation and a strong
euro.
In the past year, the European Central Bank, under the leadership of Mario Draghi,
has taken significant measures, including three-year liquidity lines for European
banks and the sovereign bond purchase programme approved by the central bank’s
board on September 6.
Europe has gone through other institutional crises and its answer has always been
further integration. Now, it appears the time has come to promote political union
along with fiscal and banking union, as endorsed by the European Council in June.
Europe must move on from being a meeting place for national interests and embark
on a shared, single political direction, which puts the interests of the entire Union and
all its citizens first.
Europe must be one and more than just the sum of its parts.
I have no doubt Europe and the euro will emerge stronger from this crisis.
2. BANKING
Now I want to talk to you about banking.
Any discussion on banking in Europe today implies banking union. Why?
Because establishing a banking union is the best way to break the vicious circle of
sovereign debt and bank debt in which we are caught.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 4

5. Today we have an international consensus, not only in Europe, that banking union
is essential to break this circle. It is a key factor in shifting the conversation from
the crisis to growth and stability. That is why we are here today.
A banking union is essential in order to break the vicious circle between sovereign
debt and bank debt; harmonise the different regulatory and supervisory practices that
still coexist within the European Union; and lastly, to reduce the fragmentation of the
European banking market to increase its efficiency and soundness.
Banco Santander is the eurozone’s largest bank in terms of market value, branches,
and customers, and I can tell you that we have found it much easier to expand in
Latin America than in Europe, where we all too often run into barriers of every sort.
I am aware that banking union is an ambitious, complex and difficult process, both
operationally and politically. The goal is clear and widely shared. We cannot afford to
postpone this issue.
Apart from these grand objectives, what does a banking union mean for
Europeans?
First, it means strengthening our financial system by enhancing supervision.
As I’ve said many times before: no amount of regulation can substitute for good
supervision.
The crisis has revealed that not all banks have been subject to the same degree of
supervision, which is one of the reasons behind the mixed performance of financial
institutions in recent years. We must align supervisory standards.
The European Central Bank is well-positioned to assume this supervisory role in the
eurozone. However, it makes sense to tackle this objective progressively, with the
ECB prioritising oversight of the most important institutions.
Secondly, banking union means enhanced transparency, thanks to a more uniform
supervisory and regulatory framework, which would include, for example, clear and
comparable criteria for stress tests. If we want a single market, there must also be
a single criterion for applying the rules.
This will allow clients and investors to differentiate between strong institutions and
weaker ones. We would all be measured by the same standards.
Moreover, once we have a single deposit guarantee mechanism and a single
resolution model, bank customers will have a simpler and clearer protection
framework.
In conclusion, banking union is crucial if Europeans are to regain confidence in the
financial system and if we, as financial institutions, are to carry out our role of
supporting the economy and providing financial services.
Europe and the banking sector must cease to be part of the problem and start
being part of the solution.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 5

6. REGULATION
Along with this key process, the financial sector is undergoing intense regulatory
reform. But, as in any post-crisis regulatory response, we must guard against
unintended consequences.
Some aspects merit special attention:
• In first place, Basel III requirements are affecting credit volumes and prices and,
consequently, the economy. Their impact must be monitored and minimised by
effectively calibrating measures and overhauling certain elements. It is also
essential to revise liquidity ratios, as is currently underway.
• Moreover, in order for capital ratios to be truly uniform, as Basel III intends,
certain pending issues must be addressed, such as standardising the way risk-
weighted assets are calculated.
• Furthermore, when identifying systemically-important banks it is key to
acknowledge the firewall systems introduced by international groups, such as
Banco Santander’s, which consists of subsidiaries that are autonomous in
terms of capital and liquidity.
This model has other advantages, such as diversity and flexibility in funding and
capital, as demonstrated by the recent IPO of 25% of our Mexican subsidiary.
All these issues lead us to a fundamental question: How should we measure the
safety and stability of financial institutions?
Clearly, many mistakes were made in this respect in the years leading up to the
crisis. The crisis triggered a profound rethink of several key elements of
banking, such as: capital, liquidity, supervision, business structure, and risk
management.
Now, it is essential to finish designing these reforms so that they strengthen the
soundness of the financial system and do not negatively affect growth.
Alongside these reforms, we are seeing a reorganisation and restructuring of
financial systems. Spain’s case is undoubtedly the most intense and will turn it into
one of the most solid financial systems in the world.
There are also proposals for structural changes in the banking sector, the most
recent of which was the Liikanen Report. I agree with this report’s suggestion that
banks should focus on commercial banking, thus supporting economic growth. I
also agree with the importance of contigency and resolution plans, or living wills.
Banco Santander’s clear model of subsidiaries, that are autonomous in terms of
capital and liquidity, enabled us to present a very solid living will to our supervisors.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 6

7. Despite the transformative impact of all these reforms, in my opinion, the key to
achieving a robust, long-term banking system and developing our role as economic
intermediaries lies not so much in regulation, but in fostering a positive banking
culture.
3. BANKING CULTURE
And what do I mean by a positive banking culture?
Basically, to ensure that banks properly carry out their basic functions: which are to
mediate between savings and lending, manage risk and focus on the customer.
A positive banking culture would have rejected the risks, lack of governance and bad
practice that has destroyed financial institutions in the US, the UK, Spain and the rest
of the European Union. Three elements are required to achieve it.
Firstly, strong corporate governance, i.e., a governance model that ensures quality
in the decision-making process including:
• a well-balanced Board of Directors that is knowledgeable about the business
and capable of challenging management decisions;
• collective decision-making and long-term vision;
• an experienced management team with clearly defined responsibilities.
Secondly, in banking it is critical to have a robust and independent risk policy, i.e.,
one which allows events to be anticipated, considers all significant variables when
taking decisions, and defines and governs our appetite for risk so that our decisions
are consistent with the interests of our clients and shareholders.
These measures are intended to prevent excessive risk-taking in pursuit of
immediate pay-offs, which is one of the causes of the current crisis.
Risk management is the mortar of our business. Regardless of size, when the
mortar fails, the building crumbles. Regardless of a bank’s size, when risk
management fails, the bank falls.
This idea is always in our minds at Banco Santander. Prudence in risk
management is bred into Banco Santander’s DNA. It is an issue to which we
devote a great deal of time on a daily basis, with a Delegated Board Committee, that
meets more than a hundred times a year. This culture of prudence allows us to
consistently maintain below-average default rates in all the markets in which we
operate.
Thirdly and finally, banking culture needs to return to the best practices and
values of banking…(Back to basics)… focusing management on the needs of the
client, providing credit and financial services to businesses and families, and above
all, putting the bank to work for the real economy.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 7

8. That may seem dull, but it is neither simple nor easy to do successfully. As a
business model, it requires a great deal of experience and skill.
Ladies and gentlemen:
I want to summarise the three messages I’ve tried to convey here today:
1- First, Europe is at a turning point. We must understand that only a united
Europe is a strong Europe. There is no turning back from the euro and the
integration of Europe. It is the best approach. And there is no Plan B.
2 - Second, our priority is to solve the sovereign debt crisis, and a key step
toward that end is a banking union. If we want a single market, there must
also be a single criterion for applying the rules and uniform supervision.
3 - And, finally, if we want a stronger banking sector in the long-term, the answer
lies in a better banking culture.
As Sir Winston Churchill said: “The farther back you can look, the farther forward
you are likely to see.”
The European Union should find even more inspiration in everything it has achieved
to advance firmly and determinedly towards greater fiscal and banking union with all
the benefits that can bring.
Thank you very much.
Remarks of Emilio Botin at the Fifth Santander International Banking Conference – November 14, 2012 8