the capital markets union - unisi.it

TheCapitalMarketsUnion:keydrivertoa"Genuine"EconomicandMonetaryUnion

Prof.RainerMaseraDeanoftheSchoolofBusiness,Unimarconi,Rome

ABI-Milano,11May2017

DRAFT10/5/2017

Summary

1.  Foreword:EMUandCMU

2.  Thedifficult“traverse”tothe4-UnionEMU

3.  FocusonCMU

4.  AneffecCveandefficientCMU:boEom-uportop-down?

5.  ABlueprintforAcCon:refocusingandimplemenCngtheCMU

6.  Concludingremarks

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1.Foreword:EMUandCMU

•  The objecCve of a European EMU of stable prices, open markets, sharedprosperity, employment and sustainable growth was defined in a SummitmeeCngof1969,andhasbeenacCvelypursuedasaprimarygoaloftheUnioneversince.

•  Significant results have been achieved – and notably the single Europeancurrencyas from1st January1999 -butas the5Presidents’Report (5PR)ofJune 2015 frankly admits, a ‛genuine’ EMU remains an unaccomplishedendeavour:divergencescreatefragiliCesforthewholeUnionwhichshouldberapidlycorrected.

•  The 5 Presidents indicate a roadmap covering the next decade to ensure agenuineEMU:theyarguethatprogressmustbesimultaneouslymadetowardseconomic,financial,fiscalandpoliCcalunion.

•  AllUnionsaremutuallyinterdependentandmustdevelopinparallel.FinancialUnion, which comprises the launching and achievement of the CapitalMarketsUnion(CMU),receivesspecialaEenCon.

•  CMUisnotanendinitself:itisakeydrivertoagenuineEMU.

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2.Thedifficult“traverse”tothe4-UnionEMU

•  The “traverse” to the4-UnionEMU is especially complexpartly because itgoesbeyondeconomicanalysisandpolicy.ThecrucialroleofCMUrequiresclarificaCon,notablyintermsofthelegalapproachtobeadopted,aswillbeindicatedbelow.

•  AgraphicalpresentaConoftheintegratedUnionmodelisofferedinChart1.•  ItmustbestressedthatcloseinteracConsexistbetweenBUandCMU.It isnot the task of this presentaCon, but the point must be made that thesaCsfactorycompleConofBUissCllmissing*,notablyintermsof:

i.  thecompleConoftheDepositInsuranceScheme,ii.  therevisionoftheResoluConFramework,iii.  the saCsfactory implementaCon of CRR II/CRD V (notably with the effecCve

introducConofproporConalityinregulaConandsupervision),iv.  keyprudenCalrulestobereviewed,tofosterEUcapitalmarketsacCviCes(see

belowpar.5).•  MoregenerallyBUandCMUshouldreconcileregulaRonandgrowth.

4*Forananalysisandsuggestedremedies,seedeLarosièreandMasera,2017.

Chart1-TheFivePresidents’FourinterdependentUnionstotransformtheeuroareaintoa‛GenuineEconomicandMonetaryUnion’*.

TheFivePresidentsapproachcanbesyntheCzedasfollows:

*«AllfourUnionsdependoneachother.ThereforetheymustdevelopinparallelandalleuroareaMemberStatesmustpar;cipateinallUnionsfortheeuroareatograduallyevolvetowardsagenuineEconomicandMonetaryUnion…A@ermanyyearsofcrisis,governmentsandins;tu;onsmustdemonstratetoci;zensandmarketsthateuroareawilldomorethanjustsurvive»(Junckeretal.,2015p.5).

2.Thedifficult“traverse”tothe4-UnionEMU

•  Under current circumstances, the concrete possibility of moving to Fiscal andPoliCcal Union in the Euroarea appears highly quesConable. The creaCon of aEuropeanState/FederaConisnotonthepoliCcalhorizon.

•  However, itmustberemindedherethatbothPresidentMiEerandandChancellorKohlindicatedthattheywerenecessaryprerequisitesforasuccessfuloperaConoftheMonetaryUnion.

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• FrançoisMiWerrandeHelmutKohl,1990:

Ouraimisthatthesefundamentalreforms-economicandmonetaryunionaswellaspoli;calunion-shouldenterintoforceon1January1993.

(LeEerby theGerman federal chancellorHelmutKohlandFrenchpresidentFrançoisMiEerrand to theIrishPresidencyoftheEC.19April1990.Source:AgenceEurope,20April1990)

• HelmutKohl,1991:

It cannot be repeated o@en enough: Poli;cal union is the indispensable counterpart toeconomicandmonetaryunion.Recenthistory,andnot justthatofGermany,teachesusthattheideaofsustaininganeconomicandmonetaryunionover;mewithoutpoli;calunionisafallacy.

(H.Kohl:ProtocoloftheDeutscheBundestag,6November1991)

3.FocusonCMU

•  WecomenowtotheCMUitself(EC,2015):theprioriCesandthecomplexiCesof the launching are well recognised and analysed, but key criCcal issuesrequireclarificaCon.

•  The 5PR underlines that primary funcCons of an effecCve, integrated andbalancedCMUare:

i.  topromotethewell-funcConingoftheSingleMarket,ii.  topermitriskdiversificaConacrosscountriesoftheeurozoneandoftheEU.The

othersideof thecoinof free,unimpededmovementsofcapital throughbanks,insurance companies and capitalmarkets is the reallocaCon of country-specificshocksacrossthewholearea.ThisbyitselfreducestheburdensonfiscalpolicieswhichcanusedwithclearlimitaConsintheeurozone,giventheinsCtuConalset-upofthevariousCompacts.

Financial Union and CMU have therefore two main posiCve features whichexplainwhyitisofparamountimportancetoensuretheirrapidcompleCon.

•  Another important typeof argument is representedby theneed to ensure alevelcommonplayingfieldfortheexternalfinanceofthecorporatesector,andnotablyforgrowinginnovaCvemedium-sizedcompaniesandforinvestmentininfrastructure.

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3.FocusonCMU

•  In the eurozone a very large share of credit flows is intermediated by thebankingsystem:morebalancedsourcesoffinancearenecessary.Thisimpliesagreater role for capitalmarkets in the financing process of companies and, inparCcular,moreequityfinance.

•  TheUnitedStatesofferclearevidencethathighlydevelopedeconomicsystemsbenefitfrombalancedandwell-integratedrelaConshipsbetweencreditmarketsandfinancial intermediaries. Itmusthoweverbeunderlinedthat in theUS,onthe one hand, the largest banking/investment conglomerates play afundamentalroleinthe“market”sector(Cetorelli,2013)and,ontheother,localbanksconCnuetoaccountforasignificantshareofexternalfinanceofmicroandsmall enterprises, largely because of a “Cered” approach to regulaCon andsupervisionofthebankingsystem(Tarullo,2015andYellen,2014and2015).

•  Dueaccountshouldalsobetakenofthefactthat intheU.S.officialguaranteeschemes for securiCsed bank loans, and notably for SMEs, have been and arebeing acCvely used (Fannie, Freddie and Small Business AdministraCon) aser2008.TheseapproachesarenotpartofthecurrentCMU/BUschemesinEurope.

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3.FocusonCMU

•  Asindicated,theFinancialUnionisalsoimportantasacushionforasymmetric/country-specific shocks,which command threemain types of response: fromintermediaries,capitalmarkets,fiscalshock-absorbers.

•  If intermediaries,marketsandfiscal responseshavemainlynaConal features,the diversificaCon of risks across countries is necessarily limited. There istherefore theneed toencourage thedevelopmentofa fully integratedCMU,but also to foster the development of truly pan-European intermediaries (asagainst naConal champions). Here again the US system of regulaCon andsupervisionshouldbecarefullyconsidered.

•  Beyondfiscalbuffersat thenaConal level,according to the IMF (Allardetal.,2013)intheeuroareaonly40%ofcountry-specificGDPshocksissmoothedbycross-country risk-sharing insurance mechanisms: 30% comes from theoperaConofbankingandcreditmarketsand10%fromcapitalmarkets;thereisno“federal”fiscalcushion.IntheUS,instead,thecorrespondingfigureis80%:45%coming fromcapitalmarkets, 20% frombanking and creditmarkets and15%byfederalstabilisers(Chart2).

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Chart2–Risksharing:InsuranceagainstincomeshocksinEMUremainslow

Inconclusion,thedevelopmentofatrulyintegrated,effecCveandefficientCMUhas posiCve macroeconomic effects and fosters economic/financial stability,therebyprevenCngand/orlimiCngsystemicrisk.

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4.AneffecRveandefficientCMU:boWom-uportop-down?*

•  ArelevantopenquesConconcerningthecreaConoftheCMUiswhetheratop-down(legislaConbased)approachshouldbefollowedoraboEom-up(marketbased)modelshouldbeadopted.

•  A combinaCon of the two schemes is required, but it should beunderlinedthattheoriginalHill/ECGreenPaper(February2015)andthe5PR gave very different answers. The EC favoured a non-legislaCvemodel,apparentlyasrequestedbymarketoperators.

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*Thisandthefollowingparagraphs,drawonthefollowingdocuments:•  Febaf,2017,TheCapitalMarketsUnionforGrowthinEurope,Brussels,17March•  Italian Government, 2017, Views in reply to the consulta;on document of the

EuropeanCommissionServicesonCapitalMarketsMid-TermReview2017,23March•  Eurofi,2017,Regulatoryupdate,Malta,5-7April•  JacquesdeLarosièreandRainerMasera,2017,MasterFinancialRegulaConandRisk

Management,SciencesPo,Paris.

4.AneffecRveandefficientCMU:boWom-uportop-down?

•  TheReport indicated, instead, that the objecCve should be to create aSingleEuropeanCapitalMarketsSupervisoryAuthority,inanalogytotheBanking Union approach (Single Supervisory Mechanism and SingleResoluConFramework).

•  Evenbeforethismedium-termobjecCve,manyimportantchangestoberapidlyenactedrequirelegalacCon:

«AtrueCapitalMarketsUnionalsorequiresotherimprovements,someofwhich can only be achieved through legisla;on, such as simplifica;on ofprospectus requirements; a revived EU market of high qualitysecuri;sa;on;greaterharmonisa;onofaccoun;ngandaudi;ngprac;ses;as well as addressing the most important boYlenecks preven;ng theintegra;onof capitalmarkets inareas like insolvency law, company law,property rights and as regards the legal enforceability of cross-borderclaims».

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•  ThelackofharmonisaConofcompanyandinsolvencylawsrepresentsacrucial impediment to the full realisaConofCMU,which feedsbackonthe Banking Union itself. A notable example is represented by theeffecCveimplementaConoftheBankRecoveryandResoluConDirecCve,especiallywithreferencetotheIntragroupFinancialSupportFramework(Lamandini,2015andFebaf,2017,p.17).

•  The relevanceof thechoicebetween the twodifferentapproacheshadbeen anCcipated and rightly stressed by Véron (2014), who arguedcorrectly in favour of addressing from a legal point of view thedevelopment of market segments, with policy iniCaCves gradedaccordingtoimpactandpoliCcaldifficulty.

•  Mostimportantly,theCMUrepresentsaplaxorm–accountbeingtakenof thecrisis in thepastdecade - for supporCng the Juncker InvestmentPlan and for enhancing investment, inclusive economic growth andemployment.“Financeforgrowth”–integratedfinanceforanintegratedeconomy.

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•  Inthetrade-offbetweenboEom-uportop-down,accountmustbetakenofthechangesinthecontextwithinwhichtheCMUhadbeendesigned.These developments Clt the balance towards well-defined top-downprioriCes.

•  ThesechangesaffectnotonlytheimplementaConofthePlan,butaboveall theconcept itselfandthestrategicorientaConof theCMU.Thishashappened to such an extent that much more than a simple mid-termreview is now required. Rather, an in-depth rethink of the aims,objecCves,Cme-tableandprioriCesoftheCMUshouldbeundertaken.

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•  ThefirstkeychangeinthecontextisclearlyBrexit,whichistakingoutoftheEUframeworkthemostimportantfinancialcenteroftheEUtodate,i.e.theCityofLondon.

•  TheUKcapitalmarketand its infrastructurecurrently representawholesalehubfortheEU,andaccountforsome50%ofEuropeancapitalacCviCes.Theirrole is especially relevant in key segments such as venture capital, equitytradingandderivaCvesmarkets.

•  Moreover, the CMU was meant from the start to be a European processmouldedandinscribedinaglobalframework,asitwasdirectedatpromoCngwiderfinancialintegraConintheglobaleconomy,opensystemsandsocieCes.ThenewTrumpadministraConintheU.S.appearstobechallengingthelong-term tenets of global finance, alongside with trade liberalizaCon andtransatlanCcrelaCons.ThisisalsoafactorthatshouldleadtoafundamentalreseyngofCMU,with a view toensuring anappropriate setup to interactwithglobalmarketsandmajorfinancialcenters (includingthecomplex issueof“offshore”enCCes).

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•  Recently, and significantly, the President of the ECB Mario Draghi (31.01.2017)reaffirmedtheconceptthatdeepfinancialintegraCon(asimpliedbytheCMU)andthesinglecurrencyaretobetwosidesofthesamecoin.HearguedthatintegratedfinancialmarketsinEuropewouldbenecessaryforaneffecCvesinglecurrency.TheCMUprojectthereforenotonlyaffectsthewidecommunityofthe27countriesofthe EU, but impacts more deeply into the Euro-zone. It represents a necessaryingredientforthestabilityandperformanceoftheEuro-area,asasinglecurrencyarea.ItisarequiredcomplementoftheBankingUnionandanintegralpartoftheinescapablestrengtheningofEMU.TheoperaConofTarget2-SecuriCes(T2S)bytheECB(2015)laysoneofthebasicfoundaConsforCMU,byprovidingthenecessarymarket infrastructure. Therefore, the implicaConsofCMU for, and its impacton,theEuro-areagiveCMUanaddedcomponentofsynergy,consistencyandurgency.

•  For the reasons above, the Mid-term Review must acquire a much broadersignificance,andmustbeplaceditinthecontextoftherevisionandadaptaConofthewholeapproach.CMUneedsanewbeginningandanoverallredesign,movingfromCMUmark1toCMU2.0,andcorrespondinglyre-adjustdeliverables,prioriCesandmethodsofwork.

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5.ABlueprintforAcRon:refocusingandimplemenRngtheCMU

•  ThekeypointsforreorientaConofCMUarepresentedinthisparagraph.•  ADecalogueforAcRonissummarizedinTable1.Manyotherimportant

points arenot takenuphere for brevity’s sake: the reference is to thefourdocumentsalreadyindicated.

•  The ten aspects analyzed here have close contacts with the broaderconsideraConsontheroleofCMUtosupportthesinglecurrencyandtheBankingUnion.

•  The deadlock on the finalizaCon/revision of Basel III/CRR and CRD iscloselyintertwinedwithsomeoftherecommendaConspresentedintheDecalogue.

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1.   InsRtuRonal/structuralreforms2.   Asinglerulebook3.   MulRple-speedCapitalMarketintegraRon4.   Focusonretail/consumermarkets5.   Complementaryfocus–withBU–onSME’s6.   ProporRonality7.   RecalibraRonofprudenRalrulesonbanks:

•  Privateequity•  Venturecapital•  FRTBandNSFR

8.   RecalibraRonofSolvencyIIforinvestmentsin:•  Infrastructure•  InnovaCon,start-upsandSMEs

9.   “Circularbonds”:businessvaluechainsandgreensecuriCes10.   SecuriRsaRonsandcoveredbonds

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* Beyond the 10 points outlined in this table, aEenCon is drawn to the addiConalimportant issues spelledout in detail in Febaf, 2017, ItalianGovernment, 2017, Eurofi,2017,deLarosièreandMasera,2017.

Table1-ADecalogueforCMU*


1.   InsRtuRonal/structuralreforms•  AserBrexit,newinsCtuConalarrangementsmustbecreatedintheEU.Itisnotonly

aquesConofthekeyoperatorsbutaboveallofinfrastructures.•  The fundamental challenge for the EU integrated Capital Market is to overcome

fragmentaRon,duplicaRonandoverlap.ItisnecessarytorecreatetheBriCshhighlyefficientmodel.ThenegoCaConswithLondonshouldavoidadestrucCveapproach.

•  As already indicated, the EU insCtuConal architecture must provide regulatoryharmonizaCon and supervisory convergence. Accordingly, the operaConal trade-offbetweenboEom-upandtop-downmodelshastobereconsidered.

•  InsolvencyregimesshouldbeconsistentlyharmonizedalsowiththeviewtofosteringtheeffecCvenessandCmelinessofjurisdicConofnaConalcourts(thisiskeyalsofortheworkingsoftheSRM).

•  Structural reforms become also very important. In this respect, the disincenCve ofequity versus debt in the European FinancialMarkets should be addressed. This iskeytofosterfinancialandeconomicstabilityinEurope.

•  Stronger capital foundaCons should not only be sought for banks and insurancecompanies, but also for the corporate sector (and, to the appropriate extent, forhouseholdsaswell).

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1.   InsRtuRonal/structuralreforms•  TaxaCon provides corporaCons an advantage for bond financing (interest

payedisdeductedfromrevenues).•  Financialandsystemicstabilityisenhancedbylessleverageandmoreequity

throughout the enterprise sector. This is especially relevant now as aconsequenceofverylow/negaCveinterestratesondebt.

•  NaConal fiscal sovereignty requires the adopCon of a commonly agreedstandard, suchas theCommonConsolidatedTaxBase (CCCTB)proposedbytheCommission(EC,2016),whichshouldreceivedfullsupportoftheCouncilandtheParliament.

•  It is noteworthy – and somewhat paradoxical! – that the important ItalianeffortinthisdirecConwithACE(AllowanceforCorporateEquity)in2011couldnot go forward in 2014 with Super ACE. The new scheme had to beabandoned because the EC regarded this approach as non-compliant withState-AidRules(ItalianGovernment,2017,p.16).

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2.   Asinglerulebook•  The CMU requires a uniform set of norms and regulaCons. In turn, this

demandsastrongsinglesupervisoryauthority(aswithSSMintheBU).•  A single rule book will replace naConal/sectoral mechanisms: consolidaCng

legislaCveandharmonizaConiniCaCvesrepresentsanambiCous,difficultbutnecessaryendeavour.

•  The difficulty of this exercise is underline by the fact that the normaCveframeworkforBankingUnionhasnotyetbeenfullyadjusted, inspiteoftheeffortsofEBA.

•  Enactmentofthesinglerulebookphilosophyisnecessaryinallareasrelevantfor banking and capital markets operaCons. The single rule book shouldincorporate the principle of subsidiarity, as will be highlighted, in point 6.below.

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3.   MulRple-speedCapitalMarketintegraRon•  TheCMUisakeycounterpartoftheEUSingleMarketandisthereforeclosely

relatedtotheulCmateobjecCveofArt.3oftheTreatyontheEuropeanUnion(promoCngthewell-beingofthepeoplesoftheEU).

•  Asindicated,theCMUisalsoanimportantcomponentoftheprocessleadingto a more saCsfactory EMU. It is essenCal to the success of the singlecurrency,andtotheeffecCveoperaConoftheECBmonetarypolicy.

•  It follows fromthesetwopremises thateveryeffortmustbemadetostriveforafully-fledgedEU-27CMU.Butifcertaincountriesdelaytheprogress,theissueoftwoormulCplespeedscannotbeavoided.

•  ItisnotaquesConofdoublestandards,butofthespeedandeffecCvenessofimplementaCon,whicharecrucialfortheEuroarea.

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4.   Focusonretail/consumermarkets•  AfundamentalquesConofdesign,presentaConandeducaConisrepresented

by the role, protecCon and access of retail customers to the CMU, both assuppliersandusersofcapital.

•  Capital markets are concentrated in few financial centers and are mainlywholesale, the CMU should be more inclusive, aEenCve to the needs andrequirements also of individual investments. As is indicated in the Febaf(2017)ContribuCon,this“shouldbeatoppriorityofthewholeCMUproject”.

•  Febaf also indicates its readiness to support the iniCaCvesofdisseminaCon,culture, educaCon and informaCon in Italy along these lines. The EC shouldbroadenanddeepentheapproachtotheEuropeanlevel.

•  TheseissuesareintertwinedwiththeaEenContoincreasingtheavailability/reducing the cost of funds to smaller enterprises and the quesCon ofproporConality(seepoints5.and6.below).

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5.   Complementaryfocus–withBU–onSME’s•  The need to rebalance the flow of external finance in the EU towards the

market is undisputed. But ways and means must be found to avoid theexcessiverigidityofbankingregulaConandsupervisionrecordedaser2008.

•  InparCcular,thedoublingofcapitalchargesforallbanksinaveryshortCmespan aser 2009 without implemenCng effecCve securiCzaCon processes ofbank loans (as was successfully done in the US) dried up credit supply inEurope and contributed to the double dip (Masera, 2012 and de Larosière,2015).ThenegaCveeffectswereespeciallyacuteforSME’sandinItaly.

•  Itisnecessarytoredressthebalance.ThelineofanalysisdevelopedinItalianGovernment(2017)iscorrectandmustbesupported.

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5.   Complementaryfocus–withBU–onSME’s“Thepriority is to focusCMUprogresson theneedsof SMEs, thesebeing thefirmsmostaffectedbythecurrentrela;velyscarceandexpensivesourcesoffinance.Whilethe full set of measures should address in a comprehensive way the financingnecessi;es of all firms, larger corpora;ons already enjoy great opportuni;es inEuropeancapitalmarketsunlikesmallerfirms.ThelaYerwiththepoten;altoaccesscapitalmarketsshould increasinglybenefit fromthedevelopmentofvariousmarketsegments, also through a transversal policy effort to enhance the cost effec;veavailability, reliability and comparability of SME related informa;on. This wouldbenefit also bank financing,whichwill con;nue to be themain source of funds forsmaller SMEs and therefore needs to be supported through the comple;on of theBankingUnion.”(ItalianGovernment,2017,p.5)

•  EffecCveimplementaConoftheselinesofaEackrequiresalsoadopCngcorrectproporConalityprinciplesinfinancialregulaCon.

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6.   ProporRonality•  In very general terms, the limits of EU competences are defined by three basic

principles: conferral, subsidiarity and proporConality: “the limits of Unioncompetences are governed by the principle of conferral. The use of Unioncompetences i s governed by the p r inc ip les o f subs id ia r i t y andpropor;onality”(EuropeanMonitor,2016).

•  ProporConalityisextremelyimportantintheEU:underthisprinciplethecontentandformofUnionAcConshallnotexceedwhatisnecessarytoachievetheobjecCvesoftheTreaty(Art.5oftheTreatyofEuropeanUnion).

•  InpracCce,intheareaoffinancialregulaConandsupervision,thisprinciplehasosenbeen disaEended or neglected, partly because of the objecCve difficulty ofapplicaCon.

•  Theprincipleisveryancient;thenoConinmodernCmeswasdevelopedandadoptedin Prussian administraCve law as from the end of the 18th century. Currently theGermanConsCtuConalCourthasadvancedandbroadenedtheprinciple.

•  In the United States a similar legal approach has been established requiring“balancing”betweencompeCngvalues(Cohen-EliyaandPorat,2010).Thisprinciplehas been fully respected in financial and banking regulaCon, notably in the Dodd-FranckAct2010.

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6.   ProporRonality•  This generalprinciplehas threemainaspectsofapplicaRon,whichwill be

reviewed in respectof theEuropeanfinancial system (the threepointsareinterconnectedbutausefuldisCncConcansCllbemadeintermsofspecificfeatures).i.  The first regards its applicaCon to all firms, enCCes and markets where

financialacCviCesareconducted.Morespecifically,thisregardstheoperaConof the so called “parallel banking system” (encompassing hedge funds,investment bank acCviCes, other funds and fund managers, various off-balancesheetitems,mortgagebrokers,andsecuriCzaConvehicles/conduits–SPV’s). The need to close the gaps in regulaCon concerning the parallelbanking system was already underlined in the de Larosière Report (2009),whereitwasrecommendedtoextendappropriateregulaConandsupervisionaccordingtotheprincipleofproporConalitytothewholefinancialsystem.

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6.   ProporRonalityii.  Thesecondreferstotheissueofone-size-fits-allversusaCeredapproachto

bankingregulaConandsupervision:−  The“narrow”definiConofproporConality inrespectofbankingregulaConandsupervision

showsverysignificantdifferences indeclinaConoftheBaselCapitalStandardsasbetweenthe EU and the US (see for instance Dodd-Frank, 2010; Guida andMasera, 2013; Yellen,2014;Masera,2016;Dombret,2017).The distorCons for the viability of small banks and the financing of micro and smallenterprises have been highlighted. The EC appears now set to take full account of theseconsideraCons(EC,23November2016).

iii.  Thethirdrelatestotheinsurancesector:−  The Febaf ContribuCon (2017) documents also the compliance distorCons of an

unsaCsfactory applicaCon of the proporConality principles for insurance companies. ThisrequirescalibratedregulatoryrequirementsandacConsinrelaContothesizeof insurancecompaniesandtothenature,scopeandcomplexityofcompanies’exposures.SofarthedefiniConandapplicaConofaproporConal frameworkhavebeenappointedtonaConal authoriCes. A more harmonized definiCon should be entrusted to EIOPA. TheItalian insurance associaCon (ANIA) is working on an operaConal proposal for the Italianmarket,consistentwithaperspecCveEuropeanharmonizedapproach.

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7.   RecalibraRonofprudenRalrulesonbanks•  European prudenCal rules on banks’ private equity exposure (CRR/CRDIV)

consider private equity riskier than other types of investment. The capitalpenalizaCon ledbanks to reduce their role in thiskeymarket,withadverseconsequencesforeconomicacCvity(Febaf,2017).

•  The case is therefore made, in analogy to the SME SupporCng Factor, toextendthe0.85reducConcoefficienttoinvestmentsuptoEuro150millioninunlistedcompanieswithyearlyturnoverofuptoEuro150million.

•  Similaradjustmentsaresuggested forbanks’ investments inventurecapitalfundsorstart-ups,whichstandtobepenalizedalsobythecomingintoforceofnewaccounCngstandards(e.g.IFRS9).

•  Strong requests to recalibrate thecurrentCRR/CRDIV frameworkcomealsofromEurofi,notablywithreferenceto:

i.  theintroducConofabindingnetstablefundingraCo(NSFR)ii.  thefundamentalreviewofthetradingbook(FRTB)

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7.   RecalibraRonofprudenRalrulesonbanksi.  IntroducConofabindingnetstablefundingraCo(NSFR):

o  Several services and market funcCons of the banks are negaCvelyimpacted by the current framework. Specific concern has beenexpressed on costs for derivaCve transacCons which appeardisconnectedfromactualfundingrisk.

o  ThemaincriCcismisleviedatthecostforequityposiConwhichappearsinconsistentwiththeCMUemphasisoncapital.

ii.  Fundamentalreviewofthetradingbook(FRTB):o  It isamplyrecognizedthattheinheritedframeworkbasedonBasel2.5

should be reviewed. But concerns are expressed on the possibleinconsistencybetween theusageof internalmodelsand theextensivebacktesCngprocedures.

o  Moreover the recalibraCon is necessary at global level, to avoid thedangerofanon-levelplayingfieldforlargeinternaConalbanks.

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8.   RecalibraRonofSolvencyII•  As already indicated for the banking industry, effecCve and robust

implementaConofCMUshouldnotinvolveunnecessary/distorCngcostsfortheoperaConoftheinsurancesector.

•  InsurersarethelargestEuropeaninsCtuConalinvestorswithanassetbaseof€10tn.Sincemostoftheassetsbacklong-termliabiliCes,thereisanaturalpotenCal for insurance companies to invest with a long-term perspecCve,alsoinilliquidassets.

•  Despite important adjustments, the Solvency II framework conCnues tosuffer fromthe implicitassumpConthat insurerscanbeviewedas traders,exposed to short-term liquidity risks. Instead, insurersarecharacterizedbyanintrinsicresiliencetotheshort-termvolaClityofassets.

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8.   RecalibraRonofSolvencyII•  Against this background, Febaf calls for acCon to recalibrate capital requirements,

notably for certain types of equity and debt investments. The case is made that forrapid,effecCveacContosupportlong-termandinfrastructureinvestments,equiCesandSME’s.CMUandthereviewprocessofSolvencyIIshouldbesynergicallylinked.

•  Debt-type assets are a natural choice for insurers to match their (osen long-term)liabiliCes, and insurers have a key interest in diversifying their allocaCon betweenvarious typesof debt assets, including corporatedebt, but also SMEdebt andprivateplacements.InthecaseofSMEdebt,theexisCngcapitalchargeisthesameasforanyotherunratedcorporatebondanddoesnotreflecthigherrecoveryrates,notevenifthedebtisbackedbyembeddedguarantees.AmoreappropriatecalibraConoftheSolvencyII framework would provide economic incenCves for insurers to opCmise theirallocaConsandsupporttheCommission’sobjecCves.

•  The effects of the “SME supporCng factor” defined in the Capital RequirementsRegulaConforbankscouldbeextendedtoinsuranceregulaCon,wheretheprerequisitesof diversifiedporxolio obtained, i.e. essenCally in the caseof purchases of SMEs’ STSsecuriCzaCon tranches. Offering insurance companies the right incenCves throughcapitalrequirementsalignedwiththoseapplyingtobanksandenhancingtransparencyand informaCon on the securiCzaCons and their underlying assets would significantlyincreaseinsurers’abilitytofinanceSMEs,albeitindirectly.

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8.   RecalibraRonofSolvencyII•  Equity-typeassetsareclearlyunderweightininsuranceporxoliosasaresult

of unnecessarily conservaCve capital requirements. Therefore, there is aclearpotenCalintheindustryforhigherallocaConstoequityassets.

•  Funding for innovaCon and start-ups osen comes in the form of privateequity.Unfortunately,thecurrenttreatmentofprivateequityisidenCcaltothat of hedge fundswith a capital charge of 49%. This approachdoes notreflect the non-volaCle nature of unlisted SME investments and createsunnecessary capital burden for insurance companies wishing to invest inSMEs.ThecapitalchargeonunlistedSMEsequityshouldbealignedwiththecapital charge on strategic parCcipaCons (i.e. 22%) and unlisted equiCes,similartolistedones,shouldbenefitfromtheSolvencyIItransiConalclause,whichwould allow for a phase-in of a standard capital charge over sevenyearsfromthebeginningofSolvencyII.

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9.   “Circularbonds”:businessvaluechainsandgreensecuriRes•  The CMU should combine sound standards with innovaCon. The Febaf

contribuCon makes the interesCng case of “circular bonds”, within therealmofcirculareconomymodels.

•  Green bonds will be issued by companies fostering restoraCve orregeneraCvebusinessmodelswithinandoutsidetheenergysector.

•  Similar financial instruments could be issued by supply chains/clusters ofSME’s. These models are already tested in the market, notably with thesupportofguaranteesissuedbyaleadcompanyinthechain.

•  BothtypesofinnovaCveinstrumentsareinlinewiththeobjecCvesandtheinstruments of the Juncker Plan. The EIB and the EFSI could develop aspecifictask forcetoassessprojectsof thesetwotypes,withina“circularbond” financial framework. Guarantee schemes offered by the EuropeanPromoConBankscouldhelpovercomeinfantindustryproblems.

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10.   SecuriRsaRonsandcoveredbonds•  Thesetworelatedissuesarelast,butcertainlynotleastinthisDecalogue.

i.   Efficient,safeanddeepsecuriRsaRonmarketsforbankloansarethekeylinkbetweenbanksandmarketfinance.Theyarealsothebridgetolong-terminvestors,notablyinsurancecompaniesandpensionfunds.Ashasbeenargued,aserthemistakesmadeinthederegulaConphaseintheUnites States –which greatly contributed to the onset of the GreatFinancialCrisis–newsafersecuriCsaConmodelswerequicklyenactedontheothersideof theAtlanCc.TherewasalsoanacCvepublicsupport inthe iniCal phase not onlywith reference to performing but also to non-performingloans(seeforinstanceBassaninietal.,2014).InEuropetheneedforacConwasquicklyrecognized(deLarosièreReport2009),buteffecCvemeasuresaresCll in thepipeline.TheECBmadethecasetorestartsafesecuriCsaConschemesin2013.TheECBandtheBankofEnglandjoinedforcesin2014topresentthecaseforagoodfuncConingmarket.

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10.   SecuriRsaRonsandcoveredbondsIn 2016 the EC made a similar case in the context of the CMU andindicatedthatthiswasaprimaryavenuetochannelfundstoSME’s.Enria(2017)addedhisvoicetothechorus.But, so far no effecCve securiCsaConmarket has been developed, andyet, according to the Commission itself, this could provide addiConalfunding to the economy of more than € 100 billion, while enhancingfinancialstabilityandsupporCngSME’s.Long-terminvestorslikeinsurancecompaniesandpensionfundshavethesize and the resources for significant investment in SME securiCzaCon.However,theyfaceregulatoryproblemsandinformaConasymmetry.TheinformaCondifficulCesstemfromtheheterogeneityoftheassetpoolandthe lack of standardized condiCons for determining the structure ofplacementsandtheirdocumentaCon.Enhanced standardizaCon, transparency and quality of securiCzaCons(including risk retenCon requirements) will support insurers’ access toandinterestinthisassetclass.

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10.   SecuriRsaRonsandcoveredbondsIn sum, required intervenCons refer both to infrastructurebuilding andrecalibraCon of banks’ and insurances’ capital requirements. The FebafdocumentaConprovidesdetailed,operaConalsuggestedsoluConstotheunresolvedproblems.

ii.   AsecondkeyrecalibraRonprocessisrequiredforcoveredbonds:fromthe investor’sperspecCve,coveredbondsofferdiversificaCon, lowriskandgoodquality investment, in that theyare typically ratedhigherthan the unsecured senior debt of the same issuer. From the issuer’sstandpoint, covered bonds offer a cost-effecCve alternaCve form ofwholesale funding, which according to the European Commission“remainedresilientagainstthebackgroundofstressedmarketcondi;ons,inpar;cularwhencomparedinissuancevolumestounsecureddebtandasset-backedsecuri;es”.

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10.   SecuriRsaRonsandcoveredbondsGreaterliquidityofcoveredbondscanbeachievedbyharmonisaCon,atEUlevel, ofquality and informaCon standards. In the frameworkofCMU, thiscouldleadtothecreaConofasinglemarketforcoveredbondsacrosstheEUandwouldhelpenlarge the investorbaseas investmentanalysiswouldbeeasiertocarryonacross-borderbasis.Any EU iniCaCves aimed at harmonising quality and informaCon standardsshould leverage on exisCng naConal frameworks that have provenexperience and a track record of high investor protecCon. In parCcular,exisCngandwellprovenstandardsandfinancial instrumentsshouldnotbeputatrisk.The harmonisaCon of Covered bond frameworks in the EU should bestructuredinabalancedwaytobebeneficialforbothissuersandinvestors.It is important toconsider thedifferenceexisCng in termofstructuresandmodelsofeachcountry,promoCngmarket integraConwithouthurCng thebestpracCcesadoptedacrossthevariousjurisdicCons.

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10.   SecuriRsaRonsandcoveredbondsTheroleofCoveredbondasafunding instrument isevenmorerelevant inviewoftheimplementaConoftheTLACandMRELframeworkwithintheEU.This is especially crucial for smaller banks, which havemore difficulCes inraising funds throughout capital markets. In this light, it is of greatimportancethatallauthorisedbanksintheEuropeanjurisdicConswouldbeallowed to issue covered bonds, regardless of their size and/or level ofcapitalizaCon(proporConalityprinciple).Theissuanceofcoveredbondsisanordinarymeanoffundingandthereforewithinthefullcontrolofbanks’soundandprudentmanagementpolicy.Ifabank saCsfies the prudenCal requirements, it should be allowed to issuecoveredbondswithoutanyaddiConalcapitalrequirementcondiCon.

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6.Concludingremarks

•  ThevisionofEMUinEuropeiniCatedin1969inHague.Significantresultswereachieved,buttheroadwaspavedwithdifficulCes.TheconCnuousquest for the right balance between monetary, economic, fiscal andpoliCcalintegraConhasbeenmanaged,defacto,inthenewmillenniumby puyng increasing burdens on and challenges for the ECB (Masera,2017).Thisoverstretchedthemonetaryunionwhich–torecall–remainsauniqueexperimentofasinglemoneywithoutastate.

•  TheprospectsoffiscalunionandofafullyfledgedpoliCcalunionappeardistantandfuzzy.Thesteadystateenvisaged-notonlybythe“fathersofEurope”,butlateralsobyKohlandMiEerandintheirofficialcapaciCes-conCnuestobeawill-o'-the-wisp.

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6.Concludingremarks

•  ThesurvivalandsuccessofEMUintheforeseeablefuturerestthereforeon a saCsfactoryoperaConof theeconomic andfinancial unions. In thisperspecCve, the correct definiRon and the effecRve implementaRon ofCMU play a key role. The CMU is one of the most ambiRous andsignificant projects of the EU. It is a fundamental component of theEuropean reform plan to re-launch investment, growth and jobs in theEuropeaneconomy,andcanmarka leap forward inachieving theSingleMarket and promoCng social and economic integraCon: i.e. “finance forgrowth”.

•  Thisrequiresarethinkof theoriginalAcConPlan2015,andcapabilityofcarryingoutthenewbuildingblocksoutlinedinthisnote,by2019.InturnthisentailscreaCnganewEU infrastructureandfosteringcapitalmarketacCviCes currently centered in London. Legal, fiscal obstacles andinsolvencyframeworksshouldbeharmonized.AdifferentgovernanceandmorepowersforESMA(andEIOPA)arerequired.

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6.Concludingremarks

•  It is a challenging, difficult, but not impossible task. The Blueprint forAcCon and the list of upcoming prioriCes outlined in this ABI/BocconiCapitalMarketsForum-inthelightoftheFebafContribuCon,theItalianGovernment Reply and theMalta Eurofi RegulatoryUpdate - hopefullycanhelpachievethisfundamentalobjecCve.

Thankyou

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