Allow me to venture to select three lessons on the basis of what I have said so far. First: the simplest solution is often the best. Simple rules, whether for fiscal policy or banking regulation, will often prevent the worst errors. And when the yellow warning light starts flashing, action must be taken. Second: confidence is essential, also for economic policy. Confidence is easily eroded and difficult – and costly – to restore. Confidence must be earned. The resolution of today’s crisis will also follow a smoother path if there is confidence in institutions – banks, central banks and governments. Borrowing costs will then decrease more quickly, the need for government cuts will diminish accordingly, and the good times will return sooner. Third: we have no magic wand. If a country has real economic problems, real adjustments must be made to solve them.25 Central banks cannot solve the problems, but what they can do is lend money when there is none available elsewhere, giving countries more time to implement necessary reforms. Deficits must be reduced. Unrestrained printing of money has led to problems on many occasions through history. If printing money is not followed up by action – in euro area countries, in the UK and in the US – Mario Draghi, Mervyn King and Ben Bernanke run the risk of being recorded in history in the same chapter as the Scotsman John Law. The full title of my speech today is “Learning from history: truths and eternal truths”.
As we have witnessed in some cases in the recent past, the holding of these securities by individuals entails problems in a context of crisis, turning them even into an obstacle for the institution’s “resolvability”. And that is exactly the opposite of what the rule originally sought. The Banco de España is determined to prevent this type of past situation from recurring. We should not make the same mistakes again. For these reasons, the challenge of covering these issues is greater for smaller-sized banks, which have a scant presence on the markets and are more geared to the retail segment. I think it is important that banks, in particular those with less access to the markets, should take advantage of those windows in which investors’ appetite for this type of asset increases, so as to bring forward as far as possible the issuance calendar. One final aspect I wish to mention is the cost of these issues and of liabilities in general. The latest Banco de España Financial Stability Report offers the findings of a study on European banks which conclude that the higher the level of the CET1 capital ratio, the lower debt issuance costs are. 9/15  This effect increases as debt instruments become more akin to capital instruments. As can be seen in the chart, if the CET1 ratio increases by 1 pp, a 0.3% reduction may be expected in the cost of issuing instruments eligible as Tier 1.