Capital Markets Union mid-term review Public hearing

CMU implementation so far and key challenges and priorities for the mid-term review

• Guntram Wolff (Bruegel)

• CMU is not a quick fix substitute for repairing the bank lending channel, but should be seen as a structural and LT transformation of the financial intermediation in the EU ; it will take time, cannot be done in 2-3 years
• twin and distinct objectives of deepening and integrating capital markets
• EU likely to remain reliant on banking for funding
• CMU is about savers, intermediaries and non-financial firms; the real issue is about savers: how can they be incentivised to increase equity investments; taxation and insolvency harmonisation are highly important in that respect
• supervision of CCPs is one of the key issues
• Brexit is an opportunity for progressing in the CMU, forces to think in a structural way; it is an additional reason for reinforcing ESMA’s role to avoid market fragmentation and regulatory race to the bottom to attract business ; importance of LT consequences of current decisions

• Markus Pleyer (Ministry of Eco. Germany)

• ultimate goals: more funding options for companies, complement bank finance by efficient market-based finance without turning to the American model
• EC has made a good job on various points: Prospectus, amendments to S2 for infrastructure; slow process on flagship project of securitisation

• equity financing is still a weak point to be strengthened
• need to support banking as well, with more proportionate legislation and reasonable capital requirement
• need to promote loan funds
• improve secondary markets for NPL through more data, quicker insolvency regimes
• need to foster fintechs
• structural reforms are needed: CMU needs good economic environment to develop
• CMU has to progress in all member States, not only in the €zone
• supervision (organisation): no final idea in Germany
• PEPP (Pan European Pension Product): in favour in principle, but has to be better designed

• Corso Bavagnoli (French Treasury)

• it is very easy to underrate the progress of CMU, but this is a mistake: achievements are significant, EC has tried hard to deliver
• Brexit brings changes to CMU: impact on market depth and liquidity (need to foster liquidity), fragmentation (need to foster consolidated tape), further need for supervisory convergence (for an easier negotiation with the UK)
• insolvency: proposals of the EC are ambitious and innovative on pre-insolvency regimes, a key reform, need to go forward, protection of creditors is too heterogeneous in Europe
• securitisation: need to review capital charges
• PEPP: France very supportive, a very important driver for channelling savings to LT investment and complementing national regimes
• need for supervisory convergence
• reorganisation of ESAs, such as integrating EBA with another ESA: no time to lose on that sort of side projects which would just complicate current work on real issues, better focus on what each should really make
• it is time to reaffirm the goal of CMU : enhanced capital markets for stronger economic growth

• Nina Gil (MEP, ECON)

• Parliament provides full support to CMU ; need to accelerate and increase ambition
• do not oppose CMU and Banking Union : banks are major actors in CMU
• securitisation : hope to reach agreement under Maltese presidency
• need to make CMU available to all : all types of companies, all countries, all savers including retail
• major CMU topics: PEPP, fintechs, sustainable finance
• all takes time, so need for action now

• Leo Arduini (Citi/AFME)

• CMU crucial for a bank like Citigroup involved in international capital markets
• Brexit : Europe has opportunity and need to strengthen CMU
• CMU for whom? the economy : deeper integration fosters economic growth
• critical issues: CRR/S2 revision, prospectus fine tuning, infra (key need for Europe), securitisation, insolvency harmonisation (necessary for improved creditor protection and level playing field), PEPP
• cumulative impact of legislation still has to be assessed

• Christian Thiman (Axa/Chairman of the EC high-level Group on Sustainable Finance)

• 3 tasks for the Group: provide a vision, integrate sustainability into regulation, propose measures to channel flows into sustainable investments ; interim report due in June and final report in Dec. 2017
• broad sense of sustainability : environment, social, …
• critical issues: Prospectus (include ESG factors), credit rating agencies (take LT sustainability factors into account), MIF (maintain research on LT issues), reporting (disclosure by companies about climate risks), green bonds (provide clarity and standardisation about the use of proceeds)
• need to overcome obstacles preventing financial actors to think LT : accounting considerations
• need for a political initiative on CMU; a quick agreement between EC, Parliament and Council on securitisation would be a good signal
• no need to reorganise the structure of ESAs: EIOPA works well, and banking and insurance are very different

• David Wright (Eurofi)

• regulatory convergence is key
• corporate governance is at the heart of sustainability
• common views on the make issues at stake
• CMU mid-term review globally rather favourable

 

Promoting access to finance SMEs

• Karen Wilson (Bruegel/OCDE)

• urgency of acting now for SMEs
• various types of SMEs: some high growth oriented, some not ; for high growth companies: need for big pockets, skilled money (expertise), connected money (networks), LT horizon
• Europe is rather good for start-ups, but problem for scaling up/2nd stage financing
• compared to the US: venture capital significantly smaller (VC funds smaller and less numerous), IPOs 10 times less, venture debt underdeveloped in Europe, 40 % of VC is from public sources

• Stefano Micosi European Issuers)

• in fact, many failures in CMU: Prospectus, MAD, MIF, …; they have been listed in the response from EuropeanIssuers
• 2 main challenges: need for equity investors (High NetWorth Individuals should be included among professional investors) + regulatory convergence is not working properly
• no real progress on cross-border investment
• need to get away from the 2 constant concerns of investor protection and reduction of risk

• Deidre Somers (Irish Stock Exchange)

• scaling up companies is as important as creating companies
• not a single regulatory solution to fight against decline in equity investment, but many local, practical answers
• retail investment is difficult to achieve, better on work on collective investment first

• Petr Koblic (Prague Stock Exchange)

• disaster for equity research after MIF: there will soon be no equity covered except for the 3 main bluechips in all countries, especially in smaller countries
• need for proportional regulation : investors in SMEs are mainly HNWI who need less consumer protection
• all Czech banks are now in foreign hands: main decisions taken from abroad

• Gerry Murphy (Blackstone)

• European VC only one fifth of US but has been multiplied by 10 in 10 years
• avg investment €70 M = ½ US
• still a fragmented market: legal, financial, fiscal
• lack of capital at critical stage
• taxation remains a central issue

• Olivier Gadja (European Crowdfunding Network)

• crowdfunding remains national due to differences in company law, consumer protection rules, languages
• market extremely diverse
• retail investors are ready to invest: appetite and significant amount of money in retail pockets ; however, retail investors will not finance all types of SMEs and one SME will not be fully funded by retail investors

• William Wright (New Financial)

• need for LT, patient capital
• 40 % of public funding is too much (crowding out)
• need for financing across the whole spectrum of company development and not focus only on the “sexy” start-up phase
• CMU is a combination of conceptual and practical measures
• appetite for reviewing impact of regulation
• EC has a role in coordinating national institutions, EU must push national governments for harmonisation for a common market

 

Jyrkyi Katainen (VP EC)

• one of the main lessons of the financial crisis is that Europe cannot depend on banks only : flow of new bank loans declined by 40 %, hence need to fill the gap
• CMU is an integral part of the Investment Plan for Europe which is a success story ; the SME window particularly successful (€8.8 bn from the EIF bringing €74 bn to 425.000 SMEs)
• Strong focus of the EFSI on sustainable finance ; role of finance for Cop 21 objectives

 

 

 

Better investment opportunities for retail and institutional investors

• Gabriel Bernardino (EIOPA)

• CMU can deliver better, citizens have to perceive the added value of CMU
• PEPP is a key instrument: brings better retirement for citizens + LT liabilities created enabling LT investment ; huge fragmentation in Europe for LT retirement savings and consumer protection rules; PEPP will work in parallel with existing regimes and not substitute to national pension programs
• PEPP should bring economies of scale, provide standardised and flexible features, be a true LT retirement product (with minimum holding period), have an attractive tax regime
• initiatives on transparency (MIF, PRIIPs, IDD, …): much information to be analysed by customers (too much ?)
• need for supervisory convergence for level playing field
• digitalisation will bring a new type of intermediation
• need to work more on the fiduciary duty of institutional investors

• Olav Jones (Insurance Europe)

• insurance in Europe: €1.2 tn to be invested
• EFSI: working well, money being spent, some crowding out however
• S2 remains main barrier to investment, also shortage of bankable investments
• infrastructure growing in assets of insurers: 3-4 % now
• PEPP product is of paramount importance

• Frank Roeters (PGGM, Dutch pension fund)

• need for some kind of public support to make infrastructure projects bankable
• institutional investors go increasingly for direct investments due to GP fees

• Guillaume Prache (Better Finance)

• need to strengthen the links between savers and investments
• number of retail investors 50 % below the pre-crisis level; savings actually channelled to bank accounts and life insurance; need to restore trust and confidence
• financially and demographically speaking, need for a simple, competitive (decent return whereas many pension products deliver negative return) PEPP product
• insurers are becoming more interested in equity to get returns
• lack of common definition for sustainable investment (like for green bonds) : it should not be a label to justify underperformance

• Alexander Schindler (EFAMA)

• room for progress for CMU: over 40 % of retail savings on bank accounts
• there will be another crisis
• sceptical about a European ESG standard, leave it with the industry
• need for LT stable regulatory environment, especially for taxation
• need for a principle-based regulation with no gold plating

• Ugo Bassi (EC)

• the EC would love having principle-based regulation and no gold plating, but very difficult to combine

• Benoît Lallemand (Finance Watch)

• no free lunch: more return = more risks
• need for a real vision economic for sustainable finance: beyond climate and green projects, also social component (quality jobs)
• need for a common definition of green bonds to avoid crisis of confidence
• need for coherence needed: fossil fuel continue to receive massive subsidies

 

Improving the functioning of the single market by removing barriers to cross-border flow of capital

• Fabrice Demarigny (Mazars)

• more unified supervision can be an answer to the lack of trust
• supervision: each ESA should evolve with the level of integration of its market, SSM cannot be replicated for ESMA
• call for action for the 2nd phase of CMU: create further trust between supervisors, investor savers through more consistent EU supervision, and inject a LT strategic vision

• Daiga Auzina (Nasdaq Riga)

• Baltic markets are considered as frontier market
• figures of cross-border investment remains small: still a lot of harmonisation steps to address

• Märten Ross (Min. Fin. Estonia)

• risk of money flowing from small markets to more liquid markets
• In smaller countries, option is only between bank deposit and real estate

• André Küüsvek (EBRD)

• need for a AAA CMU: available (no excessive regulation), accessible (to all: local, foreign, retail, institutional), affordable (reasonable cost)
• burden of regulation is very heavy for smaller players and rules are often created for the big markets
• post trading harmonisation is tricky

• Joël Mermere (T2S)

• post-trading is a key dimension, a lot remains to do
• need for a new common project like T2S
• blockchain: still too many unresolved issues to consider it is a solution

• David Hiscock (ICMA)

• CMU is aligned with what ICMA has been long trying to do
• CMU has created a new, complicated dimension for CMU; European capital markets will be competing with UK; CMU all the more imperative

 

Steven Majoor (ESMA)

• supervisory convergence, both for the aim of financial stability and investor protection, is key for CMU; freedom of establishment should not bring regulatory arbitrage
• convergence work is actually very complex, needs many tools: guidelines, opinions, Q&A, peer reviews, …
• examples of effective progress on convergence

• CCPs: now subject to identical obligations across Europe + risk models of CCPs validated
• CFDs/binary options : warnings to customers, pressure on national authorities of some countries

• however, current set of instruments is too weak; in particular, need to implement common strategy on data management

• globally, call for more powers for the markets authority

Brexit: need to prevent national regulators to compete to attract business ; will publish before summer a position paper on supervision of transferred activities.