Necessary reform of the international financial system will mean banks make smaller profits in future, Financial Stability Board President Mario Draghi said on Saturday.

The banking system will be less profitable, there will be smaller profits but less risks, it will be more secure but less speculative, Draghi told reporters after addressing European Union finance ministers at a gathering in Madrid.

Draghi said he had urged ministers not to bow to resistance from the banking sector to the reforms being discussed, such as increasing capital requirements, setting aside contingent capital for crises and imposing tougher vigilance on big banks.

My first message was 'don't be deterred', Draghi said.

The closer we get to concluding our work, the more we see that the banking industry and the broader financial industry tries to stop this progress, so my message was 'listen by all means but don't be deterred from the objective'.

Draghi, who is also governor of the Bank of Italy, said the goal was to create a system with more capital and less debt which is not exposed to what he called the perverse incentives that created the financial crisis that exploded in 2007.


The FSB, made up of government officials, central bankers and regulators, will present a menu of possible reforms to finance ministers from the Group of 20 rich and emerging nations in Washington next week, Draghi said.

These will include raising capital requirements for systemically important banks, limiting the activities they can undertake and improving the transparency and reducing the risks of derivatives trading.

One FSB idea is a provision by which debt issued by banks during normal times be transformed into equity at a time of crisis, Draghi said.

He stressed the importance of developing standardized contracts for derivatives, to be traded on centralized electronic platforms, as opposed to the bilateral, over-the-counter deals that characterize derivatives markets.

He said he favored imposing higher capital requirements as a deterrent to over-the-counter deals.

The FSB chief dismissed protests that the reforms would hurt the fragile economic pick-up, pointing out that G20 leaders had already agreed they would be introduced gradually and only after the recovery had consolidated.

Ministers are very aware of the risks of implementing the reforms in too much of a rush, he said.

Draghi also stressed that he had involved and consulted with the banking industry throughout the FSB's work, so its suggestions were not like some sort of edict from a prince.