Commissioner for Financial Stability, Financial Services and Capital Markets Union
CMU Status Report, Economic and Financial Stability, Integration Review and the Banking Union
Ladies and gentlemen,
It’s good to be here in Frankfurt.
Today, we’re publishing the first Capital Markets Union Status Report. It sets out the steps we’re taking to build a single market for capital in Europe, and reports on how we’re getting on. Alongside the Status Report, which we from now on will update every six months, we’re also publishing the 2016 edition of the Economic and Financial Stability and Integration Review, EFSIR. I’d like to start by talking about these reports, and then say something about our work to strengthen the Banking Union.
So first, EFSIR, which gives us a clearer idea of the environment in which we’re working, and which in future, should give us a better idea of the impact on Europe's capital markets of the measures we're taking as part of CMU.
So what are its main findings this year? Well, if the overall global economic environment remains uncertain, the news from Europe’s capital markets is more promising. Companies have been diversifying their sources of funding, turning to the corporate bond and stock markets to finance themselves. Alternative financing instruments like crowd funding and private placement markets still only make up a small share of their financing, but that share is steadily increasing. There’s also evidence that institutional and retail investors are exploring a broader range of investment opportunities, to diversify their risks.
In the future, as CMU measures start to come on stream, our economic analysis will give us an idea of how we’re doing against the objectives of our CMU Action Plan. So:
-Is funding increasing for start-ups and non-listed companies?
-Has it become easier for companies to raise money on public markets?
-Is long term investment increasing, particularly in infrastructure?
-Do retail and institutional investors have more options?
-And how well is investment flowing throughout the EU?
Of course, the answers to these questions will not just be a consequence of the actions we are taking as part of the CMU. That’s why we need the broader analysis. But these questions do lie at the heart of what we’re working to achieve. Asking them regularly should help make sure we’re taking the right measures, so that if they're not working as intended, we can adjust them as we go along. It will also help keep our feet to the fire, so that everyone can see how we are getting on and whether we are doing what we said we would.
There's one part of this year’s review I would like to focus on today: the analysis of the private pensions market. Europe has an ageing population. Today for every person over 65, there are four people in work; that figure will drop to two in work for every person over 65 over the next fifty years. That’s a huge demographic challenge happening at the same time as the state is reducing its role in more and more countries. So we need to think about how we can encourage a more developed private pensions markets across Europe.
And of course, as the review underlines, there's a close link between the size of pension funds and the development of capital markets. The bigger the private pensions sector, the deeper the capital markets.
Pension funds are huge institutional investors that channel funds from households to the wider economy, and deliver returns from capital market investments to anybody with a pension. By enlarging the pool of investors, these investors increase the demand for bonds and securities, and reduce the cost of raising money for companies. And pension funds can take the long view so essential for supporting long-term investments, particularly in infrastructure.
But if deep capital markets need strong institutional investors, in Europe, only a few member states, countries like Denmark, Finland, Ireland, the UK and the Netherlands, have large private pension markets. Elsewhere, these markets are relatively small. If we could build up a European market for simple personal pensions, that could provide the economies of scale we need to reduce cost and increase choice for savers who are putting money aside for their retirement. That's why this is one of the areas we have prioritised in the CMU Action Plan this year.
That brings me to the CMU status report. When I re-read it last week, I was reminded of how much work we have already set in motion, but also of course how much there is still to do and how important it will be to keep the pressure and the pace up. The Report lists the main actions that lie ahead in 2016.
As you know, we've just amended Solvency II legislation to support infrastructure investment by insurers. This has defined infrastructure as an asset class, and reduced associated capital requirements for insurers on this type of investment by nearly a third. It's the first CMU action to have taken effect, and I hope insurers will make the most of it. We've also written to EIOPA to see whether there is evidence to support extending this treatment to a wider range of infrastructure investments. I am looking forward to their reply in June.
Later this week, we'll be publishing a report on crowd funding - a small but growing source of financing across Europe - that's increasingly being used as an alternative to bank loans by smaller companies. Some 3.4 billion euros were successfully raised on European crowdfunding platforms between 2013 and 2014. That's a year on year increase of about 120%, and there's plenty of scope for these platforms to expand further.
At the moment, they tend only to operate in one country. Some Member States have introduced legislation specifically for crowd funding. As in other areas of financial innovation, the challenge for regulators is to get the balance right between the desire to open up European markets and not to regulate too soon or too intensively and thus stifle innovation. So we need to keep on top of regulatory developments, and support those markets that are only just getting off the ground by sharing best practice.
Next month, I'll be coming forward with a consultation to improve the passporting system for investment funds, including UCITS. We need an effective passporting system for investment funds as part of a single market for capital. But we know that at present smaller fund managers are struggling to offer their products in different countries. So I want to use the consultation to flush out the main barriers to funds operating in other countries, so that we can work out how best to overcome them. And build a system where investors can get hold of the information they need, where they have more choice and enjoy lower charges; and where investment funds can genuinely compete across borders not just within them.
In June, we’ll launch a consultation to map out what we can do to support the development of a European private pensions market. And to identify the barriers - especially the different rules at European and national level - that we need to overcome. I want a market that would complement, not replace, state and occupational pensions, and to build on national systems that work well to help people plan better for their future.
Before summer, we'll be bringing forward proposals to strengthen Europe's venture capital markets to build up scale, diversity and choice. Based on the results of the consultation that closed earlier this year, we'll amend existing rules on European Venture Capital Funds and European Social Entrepreneurship Funds. I want to open up the market so that more investors can get involved, and so that there are more companies they can invest in. And we’ll launch a pan-European fund-of-funds to encourage further private investment in venture capital markets. We’ll begin the process of getting asset managers on board to manage this fund before the summer.
By the end of the year, we’ll bring forward proposals to reduce differences between national insolvency regimes that are a major barrier to cross-border investment. This is one of the themes that came up again and again from the industry in the original consultation which led to our Action Plan. We want to try to make company restructuring easier, and to increase certainty for those wanting to invest across European borders. Our proposals will seek to address the most important barriers and, again, build on national regimes that work well.
Those are just some of actions in the pipeline for the next six months; and they will build on the measures that we have already taken in the last six months. Let me give you just three examples.
First, to free up bank lending to the wider economy we’ve made a proposal to restart Europe’s securitisation markets. In 2014, the securitisation market was worth 216 billion euros, about a third of its value in 2007. If we could revive that market to its pre-crisis average, this could provide an extra 100 billion euros of credit to the economy. So our proposal sets out criteria for simple, transparent and standardised securitisation, with reduced bank capital requirements for securitisations that qualify. It has had strong support from the ECB. It went through Council in record time. There will be details we need to discuss with the Parliament of course, but I am very clear: the sooner we get this measure passed the sooner we can get more lending flowing to Europe's businesses, something in the interest of all countries and political groups.
Second, to make it easier for companies of all sizes to tap public markets, we made a proposal to overhaul the Prospectus Directive. To create a prospectus regime that is simpler, faster, cheaper. I want to streamline the process for companies which have already issued a prospectus and want to raise capital again: that's currently about 70% of all prospectuses. And we're proposing to get rid of the prospectus requirement completely for companies that only want to raise small amounts, under 500,000 euros.
The ball is now in the court of the European Parliament and the Council to agree their respective positions. The signals I'm getting from both sides are positive. I'm optimistic negotiations will begin this summer and that we can move quickly to get this adopted and help businesses that want to expand.
Third, we launched a Green Paper on financial services from the perspective of the consumer. Our goal here is to identify the barriers to a proper single market in this area, and knock them down. This is the kind of approach we should take in any case but in this era of digitalisation and innovation there is a new opportunity - and a new urgency; in overcoming national boundaries. I want European consumers to have more choice, better service and lower prices. We’ve had a positive response to our consultation and we’re now busy analysing how to go about that, before coming back with our ideas on the way forward in the summer.
Alongside this work, and alongside our Call for Evidence tocheck that our legislative framework is working to support growth across the EU, we have also been working to strengthen the Banking Union.
As you know, we came forward last year with a proposal to put in place a European Deposit Insurance Scheme, EDIS, by 2024 as part of a broader plan to deepen Economic and Monetary Union. It aims to give the Banking Union the third leg that was always intended, alongside the single supervisor and single resolution authority that are now up and running. And let me again thank the European Central Bank and the Single Supervisor for all their work.
The plan with EDIS is to move from a single system of deposit guarantee schemes to a scheme that will underwrite deposits across the whole Banking Union. Depositors already have the confidence of knowing that their deposits are guaranteed up to €100,000 if their bank goes bust. As a Banking Union wide scheme, EDIS would make banks better protected if there were larger local shocks.
The idea is to build it up gradually, until it's fully mutualised by 2024. It should be cost neutral for the banks because contributions to EDIS would be deducted from what banks pay into their national DGS. And there would be strong safeguards against moral hazard.
But EDIS is part of a balanced package, with measures to reduce risk going hand-in-hand with measures to share it. We have started by keeping up the pressure for the full application of legislation we've already agreed, in particular the directives on recovery and resolution and deposit guarantee schemes. That is now pretty much done. We’ll work to apply the international standard for the Total Loss Absorbing Capacity (TLAC) of banks in a way that works for Europe. At the technical level the Commission, European Central Bank and SMM staff are working to test ideas and analyse their potential impact on banks and the economy.
I’ve already mentioned the work we’re taking forward to overcome differences in our insolvency laws. And we'll continue our work on national options and discretions. While some are there for a good reason, it's important that we avoid differences in rules that stand in the way of competition and trade across the single market.
Discussions are underway in Council and the European Parliament. No one is pretending taking forward this work is going to be straightforward, but I think the balanced approach we have taken gives us the best possible basis for progress.
These are some of the measures underway to build a single market for capital in Europe, and the latest on our work to strengthen the Banking Union.
Taken together, I think EFSIR and the CMU Status Report show that we’ve built up early momentum, and that there’s a good case for the action we're taking to deepen capital markets, to increase funding sources for business, and to make our financial system stronger and more resilient.
But these are projects that are going to require a sustained effort, over months and years. And that’s why I want to use the EFSIR and CMU Status Report to underpin what we do with solid analysis and to keep us on the right track.
Alongside our broader agenda to expand the single market, to strengthen the Banking Union, and make the EU a more attractive place to invest and to do business, we have the opportunity to strengthen the role that capital markets play in our economy. It is an opportunity that we should not miss.