Speech by Jonathan Hill, European Commissioner for financial stability, financial services and capital markets union, at the European Financial Integration and Stability Conference held in Brussels on 27 April 2015.
This time last year, I know that the focus was very much on completing the Banking Union. It's easy to take for granted what has happened since then. The SSM has got off the ground in record time and started its work as single supervisor for the Banking Union. The SRB Board Members are now all in place, doing the spade work so that they are ready when the SRB becomes fully operational at the end of this year. And, in the wider EU single market, the European Banking Authority has helped build a culture of supervisory cooperation. It seems to me, coming now to this job, that we have strong institutions in place headed by the right people, with the right skills.
Last year saw these new structures being put to a tough test: the Comprehensive Assessment, made up of the stress test and the asset quality review. Its aim was to identify and address any remaining weaknesses in the EU banking system and to dispel doubts about their health. The results show that the European banking sector is now more resilient and much better capitalised – by over 200 billion euros in the last year alone. The median EU bank participating in the Banking Union has capital ratios above 12% to deal with unexpected losses. These are similar levels to large banks in the US. Moreover, the vast majority have further buffers to withstand future shocks, which should help reassure investors.
So as a result of the new regulatory framework, the actions that supervisors have taken, and market pressure, banks are stronger. They are in a better position to get on with their primary business: lending to households and firms and financing the rest of the economy.
Nevertheless, we cannot yet say that we have completed the regulatory jigsaw. That is why it is a priority for the Commission to make sure that all Member States transpose the Bank Recovery and Resolution Directive, an essential piece of our armoury if we are to break the negative spiral between failing banks and national finances. At the beginning of the year, only five countries had adopted it into national legislation. By the end of June, we will have got that figure up to 15. Progress, yes, but not enough. So we will be keeping the pressure up on the remaining Member States to give a clear commitment that they will press on with implementing BRRD.
New approach
We have a new European Parliament. And we have a new European Commission, with a new structure where Vice Presidents coordinate our work better. This is helping to make us more focused on a smaller number of priorities, of which the biggest is jobs and growth. And I hope you can see a new sense of urgency in how we are addressing these priorities. Our new push on the single market - in energy, digital and my own area of capital markets – and on free trade is all part of our drive on jobs and growth.
Approach to regulation/ cumulative impact
We are also bringing a new approach to regulation. Under the leadership of First VP Frans Timmermans, we are working to legislate less and do fewer things better. In 2015, we will be bringing forward just one fifth of the number of new legislative proposals that the last Commission proposed on average each year. And we will be reviewing over two and a half times as much existing legislation as was usual in the past.
I will be applying this same approach to legislation in my area of financial services. I expect there to be less new legislation in the future and more focus on bedding-in the reforms of recent years. Businesses need stability and regulatory certainty. I also want to look at the cumulative effect of what we have introduced in the past, which is something for which the European Parliament has been calling. Over the last five years, we had to legislate at speed while the fires of a crisis were burning all around. What we did – what you did - made the financial system stronger.
But now I think there's a growing consensus that it makes sense to step back and ask ourselves whether we managed to get everything exactly right all of the time. Not to question the fundamentals of the approach but to take a look at the combined effect of our legislation and ask ourselves whether we have always achieved the correct balance between stability and growth.
And if the evidence does show that some of the rules are not proportionate to the risks posed by different types of institution, or that there have been unintended consequences, then we should have the confidence to adapt the framework. Yes, we need financial stability because that is the basis for sustainable growth. But we also need to recognise something else: today, the greatest threat we face to financial stability is a lack of jobs and growth.
Capital Markets Union
If the first part of my very long job title is financial stability, the last part is Capital Markets Union. Let me say a few words about that and how I think the two elements are linked. Building a stronger single market in capital is a key part of our overall effort to boost jobs and growth. At its most simple, its purpose is to provide more opportunities for savers and investors to be linked to growth. By helping to increase investment, by making it easier for businesses to grow, it should drive growth in the whole European economy.
As part of our drive to strengthen the single market in capital, we want to promote financial integration and, more specifically, the creation of large and liquid capital markets for Europe.
And by helping to create a more diversified and resilient European financial system, we can re-inforce financial stability.
Capital Markets Union and financial integration
What do I mean by integration in capital markets? I mean making it easier for capital to flow and, crucially, risk to be transferred across borders. Investment being channelled to where it can be used most productively. Market operators taking advantage of economies of scale to provide financial products and services in the most cost-effective manner. I mean boosting competition across borders, so providers can become even more cost-effective and consumers can benefit from wider choice. I mean making our economic resources go further and ensuring the financial system supports growth and jobs.
Capital Markets Union and financial stability
Capital Markets Union should help reverse the financial fragmentation that followed the recent crisis. In principle, integrated markets allow risks and benefits to be shared better across Europe. A lack of international diversification often leads to a much deeper and longer crisis in individual countries, because there is a vicious feedback loop via the domestic holders of financial assets.
If we look back with the benefit of hindsight, it is however clear that there were problems with the nature of EU financial market integration that took place before the crisis. While there were massive cross-border flows between EU countries, little risk was actually transferred. Instead, risk was retained in those countries that were tapping external funding. This pattern was amplified by financial institutions that were ill-prepared to channel the pools of funds on such a scale and EU governance frameworks that were ill-suited to deal with them.
With the crisis, financial integration itself went into reverse. Risk was created and retained in some Member States to such an extent that foreign investors were discouraged from rolling over their funding or from continuing to invest. As a result, financial flows collapsed.
Today some Member States have no shortage of funding, while others are stuck with failed projects and don't have the funding to initiate new ones. This uneven distribution in access to funding has created serious problems for many Member States, depressing economic growth and creating financial vulnerabilities.
European reforms of financial governance, including the Banking Union, were necessary to restore confidence in financial markets and help repair banks' balance sheets so that they resume sustainable lending.
A Capital Markets Union, which will mean better cross-border risk sharing via capital markets, can help diversify funding sources for market participants across all EU countries and thereby enhance financial stability for the EU as a whole.
Secondly, a Capital Markets Union can strengthen the resilience of the EU financial system by giving companies access to more diverse funding sources. We all know that the Europe’s financial system is relatively bank-based, particularly when compared to other developed economies. This has left the EU economy – certainly parts of it - less able to generate growth and jobs, as a number of banks have been recovering slowly from the enormous damage inflicted by the crisis.
But in talking about Capital Markets Union, we should not accept that there is a dichotomy between bank-based and more market-based financial systems. The truth is that we need both. A more diversified financial system – with a better balance between direct and indirect funding channels – would be more resilient and strengthen the capacity of Europe’s economy to handle any future crises.
To create a Capital Markets Union that achieves these dual goals of integration and stability, we need to ensure that people can have confidence that capital markets are governed by appropriate rules. It is not true, as some contend, that while banks are subject to tight regulation, capital markets are a "wild west" free-for-all. We have MiFID, EMIR, and rules governing different categories of investment fund. This is a highly regulated area, with a view to protecting investors by making them aware of risks and ensuring that there is proper governance and oversight.
Building Capital Markets Union step by step
We need to underpin our approach to CMU with thorough economic analysis and practical input from the financial services industry and member states. We need to work with them to identify and understand barriers and obstacles. And I hope that the European Financial Stability and Integration Review being launched today will help with that analysis. I was greatly encouraged by the support I had at the Informal ECOFIN in Riga this last weekend, not just for CMU in general, but for the step by step approach the Commission is is taking in particular, combining long term ambition with a great sense of urgency.
We have already identified a number of areas where we can make progress sooner rather than later.
Getting the market for securitisation going again in Europe could free up banks' balance sheets so they could get back to lending, their core business. Our aim is to support a framework for securitisation, singling out a category of highly transparent, simple and standardised products. This is an approach strongly supported by the ECB, the Bank of England, Basel and IOSCO, and I look forward to constinuing to work with the ECB and President Draghi and his team to try to make early progress on it.
Securitisation will not be the answer to all our challenges, and bank finance is not always the most appropriate source of funding, for instance for higher risk, higher growth companies. So we want to encourage different solutions like venture capital or IPOs that will support different types of business at different stages in their development.
It's also why we want to revise the Prospectus Directive so that it becomes easier for SMEs to fulfil their listing obligations. We are consulting on this issue too and look forward to getting practical advice on how we might improve things. We are also looking at what we could do to make SME credit information more accessible to potential investors, without imposing unnecessary administrative burdens on them.
Private placements have the potential to offer investment opportunities to long-term investors, and could broaden the availability of finance for infrastructure projects. A group of industry bodies recently launched an initiative to encourage the development of the European private placement industry. I support this, not least because I do not think legislation is necessarily always the best option. I am keen to learn about existing mechanisms that work.
Full speech
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