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If, conversely, more integrated supervision cannot be achieved, then it may be time to discard the CMU slogan altogether. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee.
EXECUTIVE SUMMARY
The European Union project of a capital markets union (CMU) was born in July 2014 from a combination of diverse factors, most prominently the realization that the EU financial system was excessively bank-based and the desire for a positive vision to tilt the balance of a forthcoming referendum on EU membership in the United Kingdom. The economic case for CMU combines considerations of financial stability (primarily in the euro area), of economic efficiency for the financing of innovation and investments, and of fairness in terms of equal access to capital across the Union. On that basis, the CMU project has received broad rhetorical support across the EU.
That apparent support, however, has failed to materialize into transformational EU policies and structural change in the EU financial system. The failure is primarily due to the inertia inherent in overcoming nationalistic defensiveness and incumbent special interests in the public and private sector. It also mirrors excessive initial optimism about moving the needle in several policy area that are not primarily driven by financial regulatory concerns, such as taxation, insolvency law, and pension finance.
Against that backdrop, a revival of the CMU vision is desirable and should be focused on reform that is achievable while being more than incremental. The best chance for that is to focus on supervisory integration. This is because a single rulebook is necessary but not sufficient to make a single market. In the heavily regulated financial sector, outcomes depend not only on the rules but on who is in charge of enforcing them: even fully harmonized rules, if implemented differently under different authorities in different member states, will not deliver European market integration. Conversely, supervisory integration would be insufficient to effect cross-border market integration, but it could play a catalytic role as the empowered EU authority would be positioned to identify the obstacles and provide consistent advocacy for their removal.
In practice, supervisory integration would entail profoundly overhauling the European Securities and Markets Authority (ESMA) and empowering it with more direct supervisory mandates. While this option has been discussed and attempted before, the current environment provides both a greater sense of urgency and more available proofs of concept in adjacent areas than in the past. Specifically, the experience of European banking supervision since 2014 grants credibility to the view that supervisory integration, if executed right, can lead to not only more uniform but also more effective supervision.
ESMA’s future governance and funding could best be modelled on what has been decided for the soon-to-be-established EU Anti-Money Laundering Authority, which incorporates the lessons of several earlier experiences in EU agency design. With due delay for preparation, its scope of direct supervisory authority should be expanded to EU-systemic financial market infrastructures, the enforcement of reporting requirements for which cross-border consistency is paramount, and other wholesale market supervisory mandates.
The overhaul and empowerment of ESMA could pave the way, over a longer-term horizon, towards a “twin-peaks” supervisory architecture for the EU financial system, with the reformed ESMA in charge of EU-level conduct-of-business supervision across the financial system including the banking and insurance sectors. That design would better address concerns about the protection of investors and financial consumers, while keeping prudential authorities focused on their objectives of safety and soundness. Conversely, if the EU-wide integration of capital markets supervision, an ambitious but by no means utopian policy concept, proves unachievable, then the time may have come to stop beating the CMU drum altogether...
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