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02 November 2016

CEPS: Eliminating the cost of non-Europe in capital markets

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Karel Lannoo calls upon the European Commission to undertake a radical upgrade of the Capital Markets Union, along the lines of the Single Supervisory Mechanism, but with a focus on strengthening the role of ESMA and the European supervisory authorities.

[...] With the implementation of some key measures regarding market abuse and benchmarks, and soon also of MiFID II, only a more unified supervisory framework will deliver the Union that Europe needs for its capital markets. Fragmented supervision gives way to regulatory competition, reduces investor protection and ultimately increases the cost of capital, as investors stay on the side lines. Two years after the announcement of the CMU Action Plan, there is now an opportunity for the EU to upgrade and strengthen its supervisory structure for capital markets. The experience of the SSM, albeit short, shows the benefits of a more unified structure, with a unique supervisory template and database, multinational supervisory teams and a single supervisor. But experience so far with the SSM also demonstrates how much remains to be done on a day-to-day basis to make the single system work. The ongoing SSM consultation on standards for non-performing loans, 25 years after the start of the single financial market, is proof of just how much banking union remains a work in progress. It cannot be stated enough that the lack of integration in Europe’s capital markets imposes a high cost on both firms and investors. [...] 

Investment products in Europe lack the scale and size of similar products in the US, and as a result the costs for investors are higher and the returns lower. In the end this means that savings languish in zero-yielding deposits rather than being invested in the markets. [...]

The way the EU has dealt with capital markets regulatory issues over the last few years is by adding layer upon layer of new rules, to achieve a single rulebook and a level playing field. [...]

To bring this regulatory levelling-up process to a halt, we need to strengthen the ruleenforcement and interpretative powers of the ESAs, to the same degree as the SSM did for the supervision of banks. In this sense, Brexit could be seen as an opportunity because member states have one excuse less for not going in this direction. In addition, the expected relocation of EBA should be an occasion to revisit the EU’s supervisory structure, and to move to a ‘twin peaks’ model in supervision, whereby all regulatory agencies will be moved under one roof, to create the second peak. This could facilitate the division of labour in the agencies, as on capital markets issues the two other agencies often intervene alongside ESMA, with EBA for prudential rules, also for capital market intermediaries (i.e. the trading book), and EIOPA for fund-related issues. This is demonstrated by the increasing number of regulatory actions taken by the Joint Committee of the ESAs, given the overlapping competences. Furthermore, a review of the agencies could revisit its decision-making structure, since today the board voting power is, unlike the SSM (and the Single Resolution Board), only in the hands of the member states. This is not institution building, it is consolidating and rendering the current structure more efficient. Today, capital market supervision is spread over diverse institutions in the member states, much more so than banking. Some countries have an FSA structure, others a twin-peak structure, and others still a specialised capital markets supervisor. In addition, the EU has recently created more capital markets supervisory competences, such as for benchmarks, derivative markets, rating and data reporting agencies. But it is only for rating agencies and trade repositories for derivative markets that these powers were passed on to ESMA. For the others, member states are expected to create the supervisory capacity they do not have. This is most evident for benchmarks, where the expertise resided with ESMA, in cooperation with IOSCO. For central counterparties (CCPs), as they concern a few systemically relevant entities with global reach, it would be much more consistent to have one supervisor, from a financial stability perspective, than colleges, whose ineffectiveness is an unwelcome reminder of the banking crisis. There is also a concern about the difference in supervisory methods and statutes of such entities. An EU-wide capital markets agency could also become the single prospectus authorisation agency for public offerings, or validate EU fund prospectuses. Following the division of labour within the SSM between ‘less significant’ and ‘significant’ institutions, small offerings or funds could be authorised locally, with a ‘droit de regard’ by the European agency. Large offerings and funds appealing to a European investor base could be authorised uniquely by the European agency. [...]

Since much of the rulemaking is complete, an empowered capital markets supervisor is the only way to deliver the benefits of a single market.  

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© CEPS - Centre for European Policy Studies

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