euro area economy : a plane flying on only one engine: bank financing
TRANSCRIPT
1
2015FEBRUARY
Unblocking the EU’s capital markets: The European Commission’s Green Paper on the Capital Markets Union
A Cicero Group analysis
2
Although integrating Europe’s capital markets is an ongoing policy objective, the importance of doing so was brought into sharp relief by the slow pace at which Europe has recovered from the financial crisis. As ECB Executive Board Member, Yves Mersch put it, “The euro area economy is like a plane flying on only one engine: bank financing.
To increase the speed and stability of the plane, it would be good to add a second engine: capital market financing”. The Capital Markets Union can therefore be seen as an effort to diversify and stimulate Europe’s financing environment by improving the efficiency and functioning of its capital markets.
The reliance on bank financing draws inevitable comparisons with the US, which has a more diverse financing environment and has recovered from the crisis far more quickly. Mid-size companies in the US receive approximately five times more funding from capital markets than their equivalents and European companies are currently going to the US to access private placement markets rather than stay in the EU.
Rates of saving are twice as high in the EU as the US, suggesting that EU markets are less effective at channelling the vast sums of savings into productive forms of investment.
Given that European savings accounts for 20 per cent of Europe’s GDP this is a significant sum that can be put to use. European officials are quick to point out that the EU is not the US but it is clear that one of the primary objectives of the Capital Markets Union is to move the EU model in that direction.
The moniker of “Capital Markets Union” is also slightly misleading for its similarity to the Banking Union. In contrast to Banking Union, the Capital Markets Union will apply to all 28 Member States and doesn’t automatically assume a push towards central supervision of capital markets. This hasn’t prevented suggestions from figures such as Jeroen Dijsselbloem, President of the Eurogroup and Roberto Gualtieri, Chair of the ECON Committee that ESMA should take on a greater supervisory role – although for now such a move seems unlikely.
In contrast to the clear policy objective and actions contained in the Banking Union, today’s Green Paper suggests a policy response as broad and complex as capital markets themselves. A set of short term actions gives way to a wide ranging mix of discussion, suggestions and questions.
The ambition of the Capital Markets Union is evident throughout the paper and responses are sought on issues that have been frustrating the industry and policymakers for years. The Commission asks for examples of best practice on how to develop risk capital markets or how to encourage institutional investors to invest in a wider range of assets.There are questions on how create a more successful private equity and venture capital regime after the lack of interest in the specific EU venture capital and social entrepreneurship funds.
A review of the prudential regime for insurers is also promised to encourage investment in complex and long term infrastructure investments.
Cicero analysis - New phrase but old idea
The phrase “Capital Markets Union”, may be new but the idea is not. As our timeline shows, better integration of Europe’s capital markets is a policy objective intertwined with the creation of the Single Market, an objective rooted in the 1957 Treaty of Rome.
A mere 58 years later, Jonathan Hill has taken office with great expectations that in the short and medium term (the next five years), critical barriers to more integrated capital markets will be removed and a more strategic plan to remove longer term barriers will be developed. Unlike other Commissioners then, Lord Hill will have a quantifiable key performance indicator – the establishment of a Capital Markets Union by 2019.
Treaty of Rome (1957)Founding treaty establishing Free Movement of Capital
Single European Act (1987)Provides impetus towards integration of capital markets
Treaty of Maastricht (1992)Free movement of capital becomes a Treaty right
Giovannini Report (2003)Identified 15 barriers to integrated financial markets
Single Market Act I/II (2011/12)Renewal of EU Single Market to boost growth
Contents
• Capital Markets - EU vs US 4
• Europe’s capital markets 5
• Next steps 6
• The Green Paper dissected 7
3
There is a real sense from the Commission that if a good idea can be presented to them then they will rigorously explore whether it can be made to work.
However, the success of the Capital Markets Union project could be limited by the fact that it is in reality, new momentum for tackling old problems. European policymakers have been trying to diversify funding and integrate capital markets for many years. Increasing the range of assets in which institutional investors can safely invest for example is not something that can be achieved through a simple legislative proposal.
Barriers to capital market integration are also complex and often impinge on national competences. National insolvency laws, differing tax regimes and pension provision all impede the ability of funds to be accumulated and channelled cross-border. These are all complicated areas which for many different reasons, have remained divided along national lines despite years of integration in other sectors.
Consequently the Green Paper represents a process that needs to be both ambitious and realistic. There is a clear demand for ideas from the Commission and a sense of willingness to tackle difficult issues. A valuable role could be played by the newly established unit for the Capital Markets Union to coordinate its actions and proposals across multiple teams and directorates – energy infrastructure investment being an obvious example.
Jonathan Hill has until the autumn to present his blueprint and until 2019 to create his Capital Markets Union. Much progress can be made but few expect it to be complete by then.
Cicero analysis - New phrase but old idea
James HughesAccount Director
Helena WalshExecutive Director
Alexander KneepkensSenior Account Executive
Sebastian Damberg-OttAccount Executive
4
Capital Markets - EU vs US
284%90%
EU 300% of GDP vs US 70% of GDPSource: EBF, 2014, International Comparison of Banking Sectors
VS
Banking system assets
$33.1bn$7.4bnEU $7.4bn (15% of global market) vs US $33.1bn (68% of global market)
Source: EY, 2014, Adapting and evolving
VS
Venture capital market
70% 70%
30% 30%
EU 70% Bank loans & 30% Market financing vs US 30% Bank loans & 70% Market financingSource: EBF, 2014, Capital Markets Union: what is at stake?
VS
Bank vs Market based financing
EU 10.56% vs US 4.90%Source: Trading Economics, 2015, European Union Personal Savings
VS
Personal savings rates
10.56% 4.90%
5
Europe’s capital markets
Supply of funding Access to finance
Real economySMEs | Mid-Cap | Large
Companies
Improving the investment chain
Mobilising pensions and
savings
Expanding range of assets for institutional
investors
Stimulating non-bank
finance fora
Promoting cross-
border retail investment
Simplifying investments in
SMEs
Facilitating infrastructure
financing
Promoting new forms of finance, e.g. securitisation, covered
bonds, crowdfunding
Harmonised trading
environment including liquidity
Improving company mobility
Common approach to insolvency
Better reporting of market data
Easing collateral flow
Promoting supervisory convergence Sound financial infrastructures
6
Next steps
2016
Q4
Q2
Q3
Q1
Publication of the Green Paper 18 February
2017
2018 2019
2015
Publication of the consultations on the Prospectus Directive and
Securitisation 18 February
EP plenary vote on ELTIFs March
EC Conference on CMU Summer
Publication CMU Action
Plan H2
Evaluation of Insolvency Framework
H2
Legislative proposal on
Resolution of CCPs
H2
Delegated Acts on SME Growth
Markets (MiFID II)H2
Consultation on EU Covered Bond
FrameworkH2
Launch of Target 2 Securities
H2
Solvency II takes effect2016
EC Work Programme December
Introduction of MiFID II / MiFIR
2017
Capital Markets Union in place
2019
CMU consultation
deadline 13 May
EIOPA advice on single market for personal pension
productsFebruary
7
The Green Paper dissected
Priorities for early action
Area Initiative Status
Review the Prospectus Directive Consultation published
Set up a framework to enable a comprehensive approach to securitisation in the EU Consultation published
Set up a framework for common minimum and comparable information for SMEs to improve SME credit information EC will hold workshops
Set up a framework for private placements to take away barriers including insolvency laws and lack of standardisation in processes, documentation and information
Evaluating market-led approach
Expand the take up of ELTIFs Potential policy opportunity
Access to finance
Increase issuance of quoted shares for large companies Potential policy opportunity
Incentivise long term investments and infrastructure investments in addition to the existing EFSI initiative Potential policy opportunity
Develop simplified, common and high quality accounting standards tailored to companies listed on MTFs Potential policy opportunity
Set up a central EU-level website for infrastructure projects Policy action identified
Set up framework for covered bond market by adopting best practices Consultation coming in 2015
Consider setting up framework for standardisation in corporate bond market, either being market led or by regulatory intervention Potential policy opportunity
Monitor industry framework to Green bonds Potential policy opportunity
Review possibilities for a cross-border approach to crowdfunding Potential policy opportunity
8
The Green Paper dissected
Supply of funding
Area Initiative Status
Identify policy measures to incentivise institutional investors to invest in a broader range of assets Potential policy opportunity
Institutional investors – Review prudential rules for lower risk debt and equity investments Policy action identified
Institutional investors – Examine a standardised product (29th regime) to create single market for personal pension provision Policy action identified
Institutional investors – Explore how to widen range of market participants in EuVECA and EuSEF and potentially remove the EUR 500 million cap on size of investors Potential policy opportunity
Examine what measures can be taken to create a better environment for business angels, venture capital and initial public offerings Potential policy opportunity
Explore the barriers to entry for new and innovative financing vehicles such as peer to peer lending Potential policy opportunity
Retail investors – Incentivise standardised or simple financial products to restore consumer confidence in financial markets Potential policy opportunity
Retail investors – Enhance cross-border competition in retail financial services, especially in electronic and mobile financial services Potential policy opportunity
Retail investors – Preparatory work on how a single market for retail financial services can deliver more benefits to consumers Policy action identified
International investors – Increase the attractiveness of EU markets to international investors Potential policy opportunity
Institutional investors - Amend prudential requirements for pension provision through the IORP II Directive
Legislative proposal in progress
International investors - Facilitate direct marketing of EU investment funds and other investment instruments in third countries Potential policy opportunity
9
The Green Paper dissected
Area Initiative Status
Enforcing the single rulebook and avoiding gold-plating to prevent divergent implementation of EU law Policy action identified
Explore a single framework to govern the treatment of cross-border investment Potential policy opportunity
Act on the possible improvements on the ESAs set out in the EC’s report on the func-tioning of the ESAs Policy action identified
Use the ESAs to prevent national supervisory regimes from creating differing investor protection standards and barriers to cross-border investments Potential policy opportunity
Consider appointing commercial entity to run consolidated tape if market-led efforts fail Policy action identified
Review if more work is needed to improve trade data and reporting Policy action identified
Set up common IT approaches for certain reporting requirements under EU legislation involving national authorities and ESAs Policy action identified
Proposal for recovery and resolution of systemically relevant financial institutions such as CCPs
Legislative proposal to be published
Potentially remove barriers to facilitate flow of collateral throughout the EU Potential policy opportunity
Assess need for changes to the securities ownership rules Potential policy opportunity
Examine potential improvements to market liquidity Potential policy opportunity
Examine legal certainty in cross-border transfer of claims Report planned in 2015
Review company law on cross-border establishment, operation of companies and company mobility Policy action identified
Improving the investment chain
10
The Green Paper dissected
Area Initiative Status
Review conflict-of-law rules on the internal functioning of companies and consequences for third parties of transfers of claims Policy action identified
Evaluate the EC Recommendation on a new approach to business failure and insolvency to prevent further divergence of national insolvency frameworks Evaluation planned in 2015
Examine the tax treatment of cross-border investments by life insurance companies and by pension funds in real estate Policy action identified
Will take action if discriminatory tax rules are found on cross-border investments by life insurance companies and by pensions funds in real estate at a later stage Policy action identified
Simplify withholding tax relief procedures related to post-trading and link in to OECD TRACE project Policy action identified
Examine the treatment of debt and equity and consider harmonised definition Potential policy opportunity
Consider targeting tax incentives for R&D expenditure at young innovative companies Potential policy opportunity
Consider measures to increase the use of modern technologies and integrate the benefits of digitalisation Potential policy opportunity
Improving the investment chain
Communications and PR expertiseCicero has strong media and PR experience, having worked across print, broadcast and online media for a number of clients. Cicero maintains
strong relationships with target media to ensure a best-in-class offering for clients. Cicero’s communications team has worked with major organisations in the UK and beyond, and has worked with BBC News, Sky News, Bloomberg, Reuters, all leading national newspapers and trade outlets.
Government relationsCicero was founded in 2000 and has grown from one client in the UK to more than 200 in 22 countries around the world today. Our public affairs business works across retail
and investment banking, commodities, insurance and asset management. Cicero was named Public Affairs News Specialist Consultancy of the Year in 2011 and 2012.
Political monitoring and intelligenceNovares, Cicero’s market-leading public policy intelligence tool, is the foundation of our monitoring and
intelligence offering. Services we provide include: Bespoke monthly issue-tracking grids; In-depth analysis of set-piece events; andVerbal consultant reports and under-the-radar intelligence based on Cicero’s wide contact base with Government, Parliament, Whitehall, regulators, think-tanks, and industry sources.
Digital For a communications strategy to be successful in today’s world of 24-hour media, integration with digital media is essential, particularly through social media. Cicero’s digital team
has worked with leading financial services organisations, including GE and Invesco Perpetual, to deliver digital media monitoring, consultancy and execution to ensure effective delivery of key messages online.
Thought leadershipCicero has managed thought leadership projects since 2000. In overseeing every aspect of the project, from initial questionnaire
design through to results, analysis and reporting, we attempt to ensure that the client is able to generate as many outcomes as possible. Cicero has previously undertaken thought leadership projects for organisations including HSBC, AXA, Scottish Widows and HM Treasury.
DesignIn a world where design is playing an ever increasing role in the success of businesses and companies, we recognise that communication needs to be clear,
quick and simple. Our corporate background means we see the bigger picture and can integrate design throughout the process. We implement communication strategies in new and engaging ways, while managing your reputation through clear and consistent design.
www.cicero-group.com
Cicero Group is an integrated communications agency specialising in corporate PR, government relations, digital communications and market research aimed at business, consumer and policy audiences. This means we understand more than any other agency the complex interaction between media, politics and policy. We have offices in London, Brussels, New York and Singapore.
Contact us Please contact Helena Walsh, Executive Director, with any further questions.
+32 (0) 2 612 8152 +44 (0) 7900 242 584
@CiceroBrussels