Analytics, EU – Baltic States, Financial Services, Investments, Legislation, Markets and Companies

International Internet Magazine. Baltic States news & analytics Friday, 29.03.2024, 15:55

Vol. 3 Financial services through EU’s policies and legislation (part II)

Eugene Eteris, BC, Copenhagen, 02.02.2016.Print version
The Capital Markets Union (CMU) aims to break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance. The current situation is being quite tough for businesses that remain heavily reliant on banks and relatively less on capital markets.

Commission’s initiative. At the heart of the Commission’s action plan is a drive to build a system that meets the financing needs of European businesses at different stages in their development, to remove barriers to small firms raising money from capital markets, and better connect information on investment opportunities in SMEs to investors in the world.

 

New funding methods ranging from money-lending and donor platforms, to investment-based crowd funding or support from business angels shall be discussed for companies in their start-up phase. For companies in early expansion phase deeper venture capital markets would offer entrepreneurs more options. It is important to look at how tax incentives for venture capital and business angels can foster investment into SMEs and start-ups.

 

The EU needs to improve the connections between retail and institutional investors, which represent “the fuel in the tank of the CMU” to companies and infrastructure projects.

 

Better information and advice is needed if retail investors are to invest on capital markets. Information should be available in a form that can be compared across investment products. This builds on a comprehensive assessment of European markets for retail investment products, including distribution channels and related services. The assessment will identify ways to improve the legislative framework and decide on how best to exploit the new possibilities for new advisory services offered by online providers and fin-tech.

 

The Commission already acknowledged existing European system that allowed investment funds to operate across the EU, but it did not work as well as it should. Thus, there are 36 000 UCITS funds in the EU, four times the number of mutual funds in the US, and of a much smaller average size. Commission’s idea is to create a proper European “passport system for investment funds” to increase competition and choice for European citizens.

 

Personal pensions have the potential to inject more savings into capital markets and channel money to productive investments. Yet the EU has no single market for voluntary personal pensions, which means that the EU is missing out on economies of scale which in turn limits choice and pushes up the cost for savers.

 

In 2016, the Commission will start the work to determine exactly what is needed to establish a European market for simple personal pensions, finding out whether or not EU legislation can help to underpin that market.

 

Commission’s Action Plan also sets the EU’s approach to long standing cross-border barriers to the free movement of capital. These range from differences in national laws on insolvency, tax and securities through to obstacles arising from fragmented market infrastructure. The consultations will proceed on key differences between insolvency and early-restructuring regimes across the EU. By the end of 2016, the EU will bring forward legislation to align insolvency proceedings better across the EU while seeking to address the current bias in the tax systems that would make it cheaper to issue debt rather than equity.

 

Together with the European Supervisory Authorities (ESAs), the Commission intends to strengthen supervisory convergence and keep a careful eye on the possible emergence of any new risks. The rules of the game need to be consistent regardless on the member states so that financial stability is safeguarded. The long-term vision shall be combined with urgent early measures to generate momentum and build confidence; hence, the Commission proposed initially six initiatives.  


Efforts to streamline CMU

= Encouraging more long-term investment in infrastructure by institutional investors. The need is to define infrastructure investment under the EU’s prudential legislation – Solvency II – and lower the capital requirements associated with it by 30%. Insurance companies have almost €10 trillion to invest in the European economy; at the moment, less than 1% of these funds are invested in infrastructure.   

 

= Relaunching European securitisation markets, in order to help diversify funding sources and free up bank lending for the wider economy. For that to happen, the EU will propose a new framework to encourage the take-up of simple, transparent and standardised securitisation. This will define a set of criteria and apply lower capital requirements when a securitisation meets those criteria. Rebuilding the securitisation market to pre-crisis levels would amount to an extra € 100 billion of investment for the European economy.

= Helping SMEs getting financing on capital markets; as part of that the EU will overhaul the Prospectus Directive, which would give investors both clear information and an affordable tool for SMEs to produce. That needs a radical review before the end of the year.

= A package of measures to support venture capital: at about € 60 million, the average European venture capital fund is only half the size of that in the US, and around 90% of EU venture capital investment is concentrated in only eight EU member states. In short, European venture capital lacks scale, diversification and geographical reach.

= Amending the Regulations on Venture Capital Funds and European Social Entrepreneurship to make it easier for more funds to participate, and be active in more investments. The EU intends to develop a pan-European venture capital fund of funds in order to provide access to large pools of international capital and enable more European projects to be financed.

= The EU will launch a call for evidence on the cumulative impact of rules in the financial services sector. Over the past five years, several legislations where adopted (over 40, in total); as a result the European financial system has become stronger. However, the speedy legislation process, in the middle of a crisis, cannot be perfect; thus, a need to create an environment that supports investment, to check that the cumulative impact of these rules hasn't had any unintended consequences. If hard evidence shows there are unnecessary regulatory burdens that damage European’s ability to invest, if there are duplications and inconsistencies, the things shall be changed.

= Encouraging retail investors to invest: later in 2015, the Commission will publish a Green Paper looking at ways of increasing choice for consumers and of increasing the cross border supply of retail financial services. The EU needs a system built on transparency, competition and choice that takes into account the development of digital services.

 

= CMU as the EU single market project

The Commission’s Action Plan is aimed at building the Capital Markets Union working with industry, the member states and the European Parliament to identify problems and barriers and then overcome them.


The EU commitment to the free movement of capital dates back to the treaty of Rome in 1957; besides the efforts during more than half a century, still greater progress has been done during last four years.


There is a political support to CMU; however several obstacles exist, e.g. differences among the member states, reviving the securitisation (which could free up a €100 billion of extra credit to the private sector), providing incentives to growing equity markets across the EU to bring the smaller ones up to the European average (while € 25 billion of additional capital could be raised each year). There is great potential for growth in Europe's venture capital market that is a fifth of the size of the US and in the EU’s private placements market that is half the size. 

 

The Commissioner J. Hill underlined that the progress would not be easy; but he believed that the member states have had a new opportunity to make European financial system more diverse and more resilient.


Reference: European Commission, Press release-Speech by Commissioner Jonathan Hill “Europe's Capital Markets Union: What is the “long-term- view”? at the 2015 ECMI Annual Conference, Brussels, 20 October 2015. In:

http://europa.eu/rapid/press-release_SPEECH-15-5870_en.htm?locale=en

 

= Financial sector and business in Europe

Following the European Investment Bank’s decision (EIB, 17 February 2015), small and medium-sized companies (SMEs) across Europe should be able to benefit from the first funds from the new European Fund for Strategic Investments (EFSI). The landmark EIB Board of Governors’ decision will allow for the pre-financing of SME projects linked to the Investment Plan for Europe before the summer.


Due to the economic and financial crisis, the level of investment in the EU has dropped by about 15% since its peak in 2007. Moreover, financial liquidity exists in the corporate sector. However, uncertainty as regards the economic outlook and high public and private debt in parts of the EU hold back investments.


Key measures in implementing the Investment Plan are the following:


- Having strong political support from all EU institutions, the aim is to use EFSI regulation and funds for infrastructure investments in transport, digital, telecoms as well as hospitals and schools;

- Include other parts of the Investment Plan for establishment of a transparent project pipeline of European investment opportunities and a European Investment Advisory Hub (EIAH) to ensure that these investments are ready by the time the EFSI is active.

- The Commission's yearly work program has set an ambitious agenda to remove regulatory barriers to investment and to strengthen the Single Market. As a first important step in the context of removing barriers and increasing access to finance, notably for SMEs, the Commission adopted a Green Paper on the Capital Markets Union.  


More information about the EU Investment Plan:

= Commission’s Website;

= Press release on EFSI; and

= http://europa.eu/rapid/press-release_IP-15-4441_en.htm?locale=en

= See: Eteris E. Financing for perspective SMEs and progressive EU’s integration. In: Financing for perspective SMEs and progressive EU’s integration


  

= Banking sector’s role in the financial sector and in supporting SMEs

Banking sector is an important contributor to jobs and growth in the EU through the support for SMEs. The sector already provides in the EU-28 about €4 trillion in loans, a big share of which goes to SMEs. In some of the states, the sector’s share in SMEs’ lending is about 30-40%. Seeking to rebuild Europe's economy, the Commission thinks that this channel of funding shall be supported and developed.


The banking sector has an important role in rebuilding trust in the financial sector. Besides, it is seen as part of the economy and society, not divorced from the mainstream; to make European economy stronger, it needs strong financial services.

 

But to be in the mainstream, the financial sector has to change. In all parts of the banking sector, there needs to be strong values and culture and a reconnection with society, businesses and customers. If banks can do that, the EU institutions will champion the contribution they make to growth and jobs.


There are many examples of smaller banks and cooperatives which have steered clear of the financial crisis and managed their businesses prudently. But the fact that a bank has a particular charter does not unfortunately guarantee that it is immune from management failure. Smaller institutions can trigger a general loss of confidence in deposit safety and spark contagion.

Recent history shows that smaller banks, operating mainly in regions of a country, can have systemic consequences. The consequences of the failure of Northern Rock in the UK in late 2007 went far beyond Newcastle-upon-Tyne. It was the first bank run in the UK for 150 years and the footage of hundreds of people queuing up at local branches became a symbol of the financial crisis.


Therefore, the EU’s response has to encompass smaller institutions and cooperatives; financial regulators cannot worry only about big banks.


Present situation in the banking sector. A period of intensive rule making in the EU in general and the banking sector, in particular, lasted last 5 years: it was a difficult task to craft rules that make sense everywhere in Europe. The EU had to respond to the financial crisis and to help restore financial stability and public confidence in the financial sector.


The EU started with creating the single rulebook; i.e. to ensure that banks were better capitalised and risks better controlled.


As the financial crisis evolved and turned into the Eurozone debt crisis, it became clear that, for those countries which shared a currency and were even more interdependent, more had to be done. The Commission has had to break the vicious circle between banks and national finances creating the Banking Union and making the European Central Bank the single supervisor for the Banking Union; besides, a supervisory cooperation via the European Banking Authority was established. As a result some strong institutions have been created with the skills they need to do the job properly.


New arrangements were tested in 2014: the largest European banks were subjected to the Comprehensive Assessment, made up of the stress test and the asset quality review (AQR). It was the widest and toughest test ever. The AQR element alone involved an in-depth examination of some € 3.7 trillion worth of Eurozone banks' assets.

 The aim was to identify and address any remaining vulnerabilities in the EU banking system and to dispel doubts about their health. This was to help restore trust and investor confidence and allow the banks to get on with their primary business: lending to households and businesses and financing the rest of the economy.

 

The European Banking Authority and the ECB worked hard to improve the situation: European banking sector has become more resilient and better capitalised, e.g. by over €200 billion in 2014 alone. EU banks’ capital ratios are now at 12%, similar to levels in the US. And the vast majority of banks have a significant buffer to withstand future shocks, which should help reassure investors.


However, not every bank passed the test successfully; some weaknesses were identified. But, having shone the lights on these weak points, supervisors both in the SSM and outside the Banking Union are now working hard with the banks concerned to put this right. Reaction abroad was positive: the US regulators and the market think now that the EU tests were credible. The Commission will continue to focus on securing financial stability needed to sustain growth. Therefore the Commission is committed to finalising rules on Bank Structural Reform, money market funds and benchmarks, and to bringing forward new proposals to deal with risks arising from entities other than banks when they need to be resolved. 


However, the Commissioner thinks that if in recent years, it was the financial crisis that posed the greatest threat to finance stability, the nature of the present threats is different due to the lack of growth.


The aim of the Capital Markets Union is to put savers in touch with more opportunities for growth. By increasing the flow of capital, the EU will increase investment opportunities, help businesses get the capital they need to expand, provide more options for people to save for their old age, and strengthen financial stability.


The EU needs to maintain the banking system’s vital role in Europe's economy and the contribution that banks make to local communities. The idea is to develop the EU’s capital markets which would complement existing sources of funding, not replacing them. In some parts of Europe, where banks are not lending, the start-ups and SMEs are struggling to survive and they need to be able to tap into alternative sources of funding.


However, banks will continue to be an important distribution channel for market funding, particularly in reviving securitisation. The aim here is to encourage an EU market for high-quality securitisation, with transparent, simple and standardised criteria. Achieving that, the EU would help free up banks' balance sheets so they can lend more to Europe's households and businesses. The Commission is of the opinion that if SME securitisations could be returned to just half the level they were in 2007, this could be worth some €20 billion in additional funding. 

The Commission launched a specific consultation on securitisation. The Capital Markets Union is seen as “an overall pot” to benefit everyone: banks, capital markets and, most importantly, firms which would find more sources of funding. Besides, the EU-wide capital market would remove obstacles to savings finding their way to productive use in the economy. At the same time, it would give a choice to companies on where and how to get financing.

 

Cumulative impact of banking rules. Legal framework for Europe's banks is not yet finished; the Commission would complete some practical details for the Capital Requirements Directive and Regulation, the BRRD and MiFID. European Banking Authority and the Commission successfully prepared large volumes of draft implementing legislation with positive developments for the successful development of the single banking market.

These reforms have brought already significant changes to banks, to their capital levels and their liquidity. Now the Commission wants to examine how these changes have affected banks’ ability to lend to businesses, infrastructure, and other long-term investment projects. In particular, it will investigate how all the recent changes have affected banks' ability to support local businesses.


In summer 2015, the Commission launched a consultation on the impact of the Capital Requirements Regulation on lending to businesses and on long-term finance, with a specific focus on SMEs. There are some visible results on the impact of increased capital charges on lending to businesses and on determining whether changes might be necessary to the CRR.


Future regulatory initiatives. During past years, the Commission has differentiated the rulemaking in order to ensure that the rules are proportionate to the risks posed and the different business models of different types of banks.

With the Capital Requirements Regulation, the EU adjusted some of the rules to recognise the specificities of savings and cooperative networks, and included favourable risk-weights for loans to SMEs. The Commission did it in the recent liquidity coverage ratios where special recognition was made of the needs of cooperative and savings banks.


However, business feels the burden of legislation on smaller, lower-risk entities; hence the idea is to make a policy differentiation while tackling future challenges with proportionality in the rule-making as a key principle. The aim is to take into account the different risks that different activities and different business models present.


For example, by the end of 2016, the Commission will decide whether it is appropriate to introduce a binding leverage ratio or ratios in the EU (in doing so, the EU need to look at the level of these ratios too). This is an issue where differentiation would be crucial.


Then, there is a need to consider net stable funding ratios: with the EBA's help, the EU will do thorough preparatory work based on careful consideration of the options, and the impact on the diversity of business models in the European banking system.


There are a number of important issues at global level like how to ensure that TLAC guidelines being developed by the Financial Stability Board fit with new EU rules on "minimum regulatory eligible liabilities" in the Bank Resolution and Recovery Directive.


The EU has been a committed supporter and a driver of reforms in the global arena. But as with the capital and liquidity rules, the EU should be in favor of implementing international standards which would make sense for Europe’s diverse financial landscape.


The Commission is keen to explore how to bring the benefits of a safe, stable, well-regulated single market for financial services more directly to consumers in order to be able to benefit from more competition in the EU. It includes both the people who actively move to another country or seek out offers across borders, and all those who remain in their home countries. They, too, should have greater choice, lower prices and a wide range of products suited to their needs.


Thus, the EU needs to consider how quickly banking is changing in the face of new technology and the development of digital services, how the threat of cybercrime could jeopardise the gains already made in enhancing the EU’s financial system safety and security. But different risks that different activities, as well as different business models will be taken into account.

It can be said in the conclusion that a healthy European banking sector can support growth as well as benefiting EU's citizens, companies, and society as a whole; a system in which taxpayers have to bail out failing banks shall be excluded, said the Commissioner.


Such system shall be diverse, well-regulated, adequately managed and supervised; the system built on strong ethical standards and sound governance. EU banks have made good progress towards that goal; however, the banks have had to respond to the financial crisis.


Future challenges are not met with a volume of new legislation, but businesses want and need regulatory certainty in order to be able to plan ahead. Hence, the Commission will seek to look at regulation through the prism of jobs and growth, and to adopt the Commission would manage a proportionate risk-based approach which reflects the diverse nature of the banking sector.

One thing is certain, strong EU’s economy needs strong banks playing their part in a new European renaissance.

Reference: European Commission, Speech by Jonathan Hill, European Commissioner responsible for financial stability, financial services and capital market union at the 6th Convention on Cooperative banks in Europe. Brussels, 3 March 2015. In:   

http://europa.eu/rapid/press-release_SPEECH-15-4537_en.htm?locale=en


Financial and banking sectors: supporting European SMEs

Banking sector is an important contributor to jobs and growth in the EU through the financial support for SMEs. The sector already provides in the EU-28 about €4 trillion in loans, a big share of which goes to SMEs. In some of the states, the sector’s share in SMEs’ lending is about 30-40%. Seeking to rebuild Europe's economy, this channel of funding shall be supported and developed.

 

The banking sector as a whole has a big job to do in terms of rebuilding trust in the financial sector. It has to be seen as part of the economy and society, not divorced from the mainstream; to make European economy stronger, it needs strong financial services.


But to be in the mainstream, the financial sector has to change. In all parts of the banking sector, there need to be strong values and culture and a reconnection with society, businesses and customers. If banks can do that, the EU institutions will champion the contribution they make to growth and jobs.


Sectors’ role. There are many examples of smaller banks and cooperatives which have steered clear of the financial crisis and managed their businesses prudently. But the fact that a bank has a particular charter does not unfortunately guarantee that it is immune from management failure. Smaller institutions can trigger a general loss of confidence in deposit safety and spark contagion.


Recent history shows that smaller banks, operating mainly in regions of a country, can have systemic consequences. The consequences of the failure of Northern Rock in the UK in late 2007 went far beyond Newcastle-upon-Tyne. It was the first bank run in the UK for 150 years and the footage of hundreds of people queuing up at local branches became a symbol of the financial crisis.


Therefore, the EU’s response has to encompass smaller institutions and cooperatives; financial regulators cannot worry only about big banks.


Present situation. A period of intensive rule making in the EU in general and the banking sector, in particular, lasted last 5 years: it was a difficult task to craft rules that make sense everywhere in Europe. The EU had to respond to the financial crisis and to help restore financial stability and public confidence in the financial sector.

The EU started with creating the single rulebook; i.e. to ensure that banks were better capitalised and risks better controlled.


As the financial crisis evolved and turned into the Eurozone debt crisis, it became clear that, for those countries which shared a currency and were even more interdependent, more had to be done. The Commission has had to break the vicious circle between banks and national finances creating the Banking Union and making the European Central Bank the single supervisor for the Banking Union; besides, a supervisory cooperation via the European Banking Authority was established. As a result some strong institutions have been created with the skills they need to do the job properly.


New arrangements were tested in 2014: the largest European banks were subjected to the Comprehensive Assessment, made up of the stress test and the asset quality review (AQR). It was the widest and toughest test ever. The AQR element alone involved an in-depth examination of some € 3.7 trillion worth of Eurozone banks' assets.


The aim was to identify and address any remaining vulnerabilities in the EU banking system and to dispel doubts about their health. This was to help restore trust and investor confidence and allow the banks to get on with their primary business: lending to households and businesses and financing the rest of the economy.

 

The European Banking Authority and the ECB helped to make the European banking sector more resilient and much better capitalised – by over €200 billion in 2014 alone. EU banks’ capital ratios are now at 12%, similar to levels in the US. And the vast majority of banks have a significant buffer to withstand future shocks, which should help reassure investors.


However, not every bank passed the test successfully; some weaknesses were identified. But, having shone the lights on these weak points, supervisors both in the SSM and outside the Banking Union are now working hard with the banks concerned to put this right. Reaction abroad was positive: the US regulators and the market think now that the EU tests were credible.

As a result of the new regulatory framework, supervisors’ actions and market pressure, the EU banks are now stronger putting them in a better position from which they will be able to lend again.


The Commission continues efforts on securing financial stability needed to sustain growth: e.g. the Commission is finalising rules on Bank Structural Reform, money market funds and benchmarks, while bringing forward new proposals to deal with risks arising from entities other than banks when they need to be resolved. 


However, according to the Commission, in recent years, it was the financial crisis that posed the greatest threat to finance stability; however, the nature of the present threats is different due to the lack of growth.


Commission President Juncker’s first major policy idea was to launch a €315 billion investment plan to help kick start investment in infrastructure. In February 2015, the Commission unveiled the first phase of a new drive to build a single market for capital, i.e. a Capital Markets Union for EU-28 states, which is supposed to bring new opportunities for businesses, for retail and institutional investors as well as for the banks.


As is known, the aim of the CMU is to put savers in touch with more opportunities for growth. By increasing the flow of capital, the EU will increase investment opportunities, help businesses get the capital they need to expand, provide more options for people to save for their old age, and strengthen financial stability.


Hence, the EU needs to maintain the banking system’s vital role in Europe's economy and the contribution that banks make to local communities. The idea is to develop the EU’s capital markets which would complement existing sources of funding, not replacing them. In some parts of Europe, where banks are not lending, the start-ups and SMEs are struggling to survive and they need to be able to tap into alternative sources of funding.


The banks will continue to be an important distribution channel for market funding, particularly in reviving securitisation, with the aim to encourage an EU market for high-quality securitisation, with transparent, simple and standardised criteria. Achieving that, the EU would help free up banks' balance sheets so they can lend more to Europe's households and businesses. Experts say that if SME’s securitisations could be returned to just half the level they were in 2007, this could be worth some €20 billion in additional funding.

 

The Commission sees that the Capital Markets Union as “an overall pot” to benefit everyone: banks, capital markets and, most importantly, firms which would find more sources of funding. Besides, the EU-wide capital market would remove obstacles to savings finding their way to productive use in the economy. At the same time, it would give a choice to companies on where and how to get financing.


On banking rules. Legal framework for Europe's banks is not yet finished; the Commission would complete some practical details for the Capital Requirements Directive and Regulation, the BRRD and MiFID.


European Banking Authority and the Commission prepared large volumes of draft implementing legislation with positive developments for the successful development of the single banking market. These reforms have brought already significant changes to banks, to their capital levels and their liquidity. Now the Commission wants to examine how these changes have affected banks’ ability to lend to businesses, infrastructure, and other long-term investment projects. In particular, it will investigate how all the recent changes have affected banks' ability to support local businesses.


In summer 2015, the Commission launched consultations on the impact of the Capital Requirements Regulation on lending to businesses and on long-term finance, with a specific focus on SMEs.


During past years, the Commission has differentiated the rulemaking in order to ensure that the rules are proportionate to the risks posed and the different business models of different types of banks.


With the Capital Requirements Regulation, the EU adjusted some of the rules to recognise the specificities of savings and cooperative networks, and included favourable risk-weights for loans to SMEs. The Commission did it in the recent liquidity coverage ratios where special recognition was made of the needs of cooperative and savings banks.


However, business feels the burden of legislation on smaller, lower-risk entities; hence the idea is to make a policy differentiation while tackling future challenges with proportionality in the rule-making as a key principle. The aim is to take into account the different risks that different activities and different business models present.


For example, by the end of 2016, the Commission will decide whether it is appropriate to introduce a binding leverage ratio or ratios in the EU (in doing so, the EU need to look at the level of these ratios too). This is an issue where differentiation would be crucial.


Then, there is a need to consider net stable funding ratios: with the EBA's help, the EU will do thorough preparatory work based on careful consideration of the options, and the impact on the diversity of business models in the European banking system.


There are a number of important issues at global level like how to ensure that TLAC guidelines being developed by the Financial Stability Board fit with new EU rules on "minimum regulatory eligible liabilities" in the Bank Resolution and Recovery Directive.


The EU has supporter reforms in the global arena: alongside the capital and liquidity rules, the EU should is in favor of implementing international standards which would make sense for Europe’s diverse financial landscape.


The EU needs to consider how quickly banking is changing in the face of new technology and the development of digital services, how the threat of cybercrime could jeopardise the gains already made in enhancing the EU’s financial system safety and security. But different risks that different activities, as well as different business models will be taken into account.

Thus, healthy European banking sector would support growth as well as benefit EU's citizens, companies, and society as a whole; and a system in which taxpayers have to bail out failing banks shall be excluded.


Such system shall be diverse, well-regulated, adequately managed and supervised; the system built on strong ethical standards and sound governance. EU banks have made good progress towards that goal; however, the banks have had to respond to the financial crisis.


References from: European Commission, Speech by Jonathan Hill, European Commissioner responsible for financial stability, financial services and capital market union at the 6th Convention on Cooperative banks in Europe. Brussels, 3 March 2015. In:   

http://europa.eu/rapid/press-release_SPEECH-15-4537_en.htm?locale=en


Improving and facilitating access to finances for Latvian SMEs

The European Commission has agreed that a new Latvian financial institution (SDI) is compatible with EU state aid rules. The Commission agreed that SDI will facilitate access to finance: in particular, through loans, guarantees, equity injections or grants, mainly to SMEs, start-ups, mid-cap and micro-enterprises, but also to individuals and companies active in the agricultural sector.


The approval of the scope of activities of SDI in June 2015 is also the last step in the restructuring of Latvian bank MLB, which had originally a dual role, operating both as development and commercial bank.


Between 2009 and 2013, MLB benefitted from various state support measures, including recapitalization processes, liquidity support and guarantees. The 2011 transformation plan agreed between Latvia and the EU, provided that MLB would be stripped of its commercial activities and transformed into a pure development entity.

In July 2013 the European Commission found the support measures granted by Latvia for this transformation were in line with EU state aid rules. In 2014, after the sale of commercial part, MLB's remaining active development part was renamed Altum.


Financing Latvian business and SMEs. In December 2014, Latvia notified to the Commission the scope of activities of the SDI, which was established as a result of the recent merger of three State-owned institutions – Altum (the former Mortgage and Land Bank), the Latvian Guarantee Agency (LGA) and the Rural Development Fund (RDF). These institutions had been providing various forms of financing to the Latvian economy.

Latvia plans to inject more than € 512 million of capital from state resources into the SDI for the period 2015-2022. The SDI will use this budget to act within a strictly defined remit, based on identified market failures. It will in particular offer financing – such as loans, guarantees, equity injections or grants – mainly to SMEs, start-ups, mid-cap and micro-enterprises, but also to individuals and companies active in the agricultural sector. The SDI will also act as a financial intermediary and channel funds for programs and projects co-financed by international financial institutions, such as the European Investment Bank or the European Bank for Reconstruction and Development.


The Commission assessed this measure under EU state aid rules, which allow Member States to grant aid to support the development of certain economic activities. The Commission found in particular that the SDI will intervene only when financing is not readily available in the market. This will avoid that private investment is crowded out by the state funding. Moreover, the SDI's activities are subject to specific criteria that ensure they do not unduly distort competition in the Single Market and are fully in line with EU state aid rules.


Before the merger, the three institutions (Altum, the LGA and the RDF) were also involved in other activities that are not directly related to the fundamental objectives of a development financial institution. The Latvian authorities have committed that the SDI will cease, wind-down or sell these legacy activities that are outside its approved scope as soon as possible and by 31 December 2018 at the latest.


Given that the market for SME financing and in particular the scope of the market failures may evolve, the Commission has granted approval until 31 December 2022. This may be prolonged, following a reassessment. If in the future the SDI were to be given further responsibilities outside the agreed remit, these may need to be notified to the Commission for approval.

The Commission agreed that the new institution would address financial market failures in Latvia without unduly distorting competition in the Single Market.


The non-confidential version of the present decision is available under case number SA.36904 in the State Aid Register on the competition website once confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.


Reference: European Commission, Press release IP-15-5146 “State aid: Commission approves creation of Latvian Development Institution to facilitate SMEs financing”, Brussels, 9 June 2015. In: http://europa.eu/rapid/press-release_IP-15-5146_en.htm?locale=en.


EU supports financing SMEs by using local financial intermediaries

The mandate agreement signed between the European Commission and the European Investment Fund (EIF) in Brussels on 24 June 2015 was aimed at promoting growth in the EU by assisting SMEs and micro-enterprises in access to finances. Over €500 million of financial support will be made available under the European Program for Employment and Social Innovation (EaSI).


The EaSI program will provide a €96 million guarantee for the period 2014-2020 which is expected to mobilise over €500 million in loans. The program targets individuals who wish to start or further develop their own social and micro-enterprises, in particular, people who have difficulties in entering the job market or in accessing finance.


In the officials’ comments on the EaSI, Commissioner for Employment, Social Affairs, Skills and Labour Mobility, Marianne Thyssen underlined that with the support of funding, tens of thousands of jobs will be created. By easing access to finance, the new enterprises will be set up and existing ones will be scaled up. She added that the program the EU has launched in June 2015 was a “clear expression of the Commission's firm commitment to create jobs and growth and improve social conditions".


The European Investment Fund, EIF Deputy Chief Executive, Marjut Santoni said that the present agreement with the European Commission enabled the EIF to support even more micro-enterprises across Europe over the next 7 years. This program builds on the successful EU Progress Microfinance Initiative, EaSI’s predecessor, through which 50 of the EIF’s cooperation partners across more than 20 EU countries mobilised financing for more than 30,000 disadvantaged micro-entrepreneurs, many of which were previously unemployed.


Using local financial intermediaries. The guarantee for microfinance or social finance providers is managed and implemented by the EIF on behalf of the European Commission. The €96 million EaSI Guarantee will offer credit risk protection for lending products provided to social and micro-enterprises. The previous Progress Microfinance initiative helped to create and preserve more than 47,000 jobs and the EaSI will build on its successes.

 

The EIF will not provide direct financial support to enterprises but will implement the facility through local financial intermediaries, such as microfinance and guarantee institutions, as well as banks active across the EU-28 and additional countries that are participating in the EaSI program. These intermediaries will deal directly with interested parties to provide support under the facility. Countries which have the possibility to take part are EEA countries, in accordance with the EEA Agreement, and EFTA countries; EU candidate countries and potential candidate countries, in line with the framework agreements concluded with them.


European Investment Fund, EIF. The European Investment Fund (EIF) is part of the European Investment Bank group. Its central mission is to support Europe's micro, small and medium-sized businesses (SMEs) by helping them to access finance. The EIF designs and develops venture and growth capital, guarantees and microfinance instruments which specifically target this market segment. In this role, the EIF fosters EU objectives in support of innovation, research and development, entrepreneurship, growth, and employment.

The EIF’s total net commitments to private equity funds amounted to over €8.8 billion at the end of 2014. With investments in over 500 funds, the EIF is a leading player in European venture due to the scale and the scope of its investments, especially in high-tech and early-stage segments. The EIF’s guarantees loan portfolio totaled over €5.6 billion in over 350 operations in 2014, positioning it as a major European SME guarantees actor and a leading micro-finance guarantor.


Programme for Employment and Social Innovation, EaSI. Under the European Program for Employment and Social Innovation (EaSI), the European Commission supports microfinance and social entrepreneurship finance with an overall envelope of €193 million for the period 2014-2020. The aim is to increase access to microfinance, i.e. loans of up to €25 000, in particular for vulnerable persons and micro-enterprises. In addition, for the first time, the European Commission will also support social enterprises through investments of up to €500 000.

The microfinance and social entrepreneurship support will be first implemented through the EaSI Guarantee, which shall enable microcredit providers and social enterprise investors to reach out to entrepreneurs they would not have been able to finance otherwise for risk considerations.


The European Commission has selected the EIF to implement the EaSI Guarantee.


Further information on EU microfinance and social entrepreneurship support see:

- Easi Programme; and - EU support to social entrepreneurship.

References: European Commission, press release “European Commission and European Investment Fund mobilise €500 million for social and micro-entrepreneurs”, Brussels, 24 June 2015. In: http://europa.eu/rapid/press-release_IP-15-5248_en.htm?locale=en


Support for science: European Fund for Strategic Investments, EFSI. The regulation creating the European Fund for Strategic Investments (EFSI) was formally adopted by the European Parliament on 24 June 2015, paving the way for implementation in the second half of the year.


Following the agreement reached in “trilogue” discussions between the European Commission, the Council and the Parliament, the vote confirmed that the guarantee for the fund will be financed via the reallocation of resources originally dedicated to the Connecting Europe Facility and the EU Horizon 2020 program.


The increased use of available margins in the budget nevertheless decreases the contribution of Horizon 2020 from €2.7 billion to €2.2 billion. The Council formally endorsed the regulation by written procedure; it entered into force in July 2015.


The European University Association (EUA) notes that the new amount of €2.2 billion will be spread over the other pillars of Horizon 2020 (excluding “Excellent Science” and “Spreading Excellence and Widening Participation”) in proportion to the distribution initially proposed by the Commission.


While fundamental research is not affected by EFSI, with the funding originally foreseen for the European Research Council and Marie Skłodowska-Curie actions being restored, collaborative research remains gravely hit by these cuts.


EUA deeply regrets the signal that is being sent to the research community in this regard, and recalls the importance of university research for Europe’s overall economic recovery.

On behalf of Europe’s universities, EUA will hold the European institutions and the EU governments to their promise of making the most extensive use of available margins in the EU budget each year, with the view to relieve the pressure on Horizon 2020 resources. The second draft budget for 2016 that the European Commission is expected to release soon will constitute a first test.

References from: EUA policy brief on EFSI


Investment issues as part of the EU financial sector

First efforts towards more adequate EU financial services started already in January 2015 with the so-called “financial compass” (or “fi-compass”) to provide for an advisory service on existing and planned financial instruments. 


On 19 January 2015, the European Commission (vice-president Jyrki Katainen), in partnership with the European Investment Bank (EIB vice-president Wilhelm Molterer) launched a new service for the European Structural and Investment Funds. Fi-compass will enhance financial and technical assistance to public and private promoters while providing transparency to investors. A transparent project pipeline of viable projects will be launched with the EIB later in 2015.     


The fi-compass’ service is part of the "one stop shop" advisory hub as an important part of the EU Investment Plan. The plan’s implementation has been moving fast: just 50 days after President Juncker announced plans for an EU’s investment offensive, the Commission launched a legislative proposal for the European Fund for Strategic Investments - to mobilise at least €315 billion in private and public investment across the European Union member states.


With the launch of fi-compass, the Commission and EIB are moving quickly to deliver on the actual investment in the economy. This instrument aims at enhancing technical assistance (with an advisory hub to provide all the necessary financial and technical support to public and private promoters) and providing transparency to investors. A transparent project pipeline of viable projects will be launched with the EIB later in 2015.  

 

EU’s investment plan: three pillars. Since the launch of the EU’s investment plan, much of the attention has been on the additional risk financing provided by the plan’s first pillar, i.e. the European fund for Strategic Investments, EFSI.


However the EU investment plan has two other pillars with equal or even greater importance; the second one is about investments in the real economy with better technical assistance. The most relevant part of the EU Investment Plan deals with changing Europe and the way public money is spent structurally and permanently. The EU needs open-up new investment opportunities with greater transparency and better technical assistance.


Finally, the EU’s third pillar, aimed at creating a true Single Market; all these pillars must be complemented by a series of measures to remove barriers to investment and to create a true European integration.


There is a lot of technical detail in the investment plans, therefore, argued Vice-President J. Katainen, it is important not to lose sight of the big problem: a crisis of confidence is holding back the investment flows that are the lifeblood of Europe's economy.


Taken as a whole, these three pillars will restore investor confidence and get investment flowing into the regions and sectors of European economy where job creation is needed most.

 

Draft legislation to streamline investments. Less than two months after announcing its ambitious strategy to boost jobs and growth, the European Commission has presented the draft law to put the investment plan in place.


As part of the legislative proposal, the Commission also proposed the creation of the European Investment Advisory Hub in partnership with the EIB to provide enhanced technical assistance to public and private promoters. Such technical assistance must help public and private promoters to better understand the technical instruments (with platforms like Jaspers or the new one, Fi-Compass) and help stakeholders to better prepare their projects.

As is known, structural funds programs will also make a significant contribution to the objectives of the Investment Plan, and the commitment by the EU member states to a more effective use is a complementary element of the Plan.

The Commission encourages member states (as well as regional and local authorities) to make extensive use of innovative financial instruments for the 2014-20 programming period in key investment areas such as SME-support, energy efficiency, information and communication technology, transport and R&D support.


This significant increase of the use of financial instruments for ESIF to achieve an overall doubling compared with 2007-13 is set out in the Investment plan and incorporated into the Commission work program. Instruments, such as loans, equity and guarantees, are relatively new to many public authorities compared to grants, but they have proven ability to deliver support to the real economy.


The new rules for ESIF 2014-20 have enlarged the scope for the use of financial instruments; they can also be used for infrastructure projects such as broadband, waste water treatment and transport, including in rural development.

 

New financial instruments. Financial instruments include loans, guarantees, equity, venture capital and other risk-bearing instruments, possibly combined with interest rate subsidies or guarantee fee subsidies. They represent a resource-efficient way of using EU budget funds to enable investment in the economy.


ESI Funds regulations for 2014-20 have widened the scope of financial instruments to include all thematic objectives and all five European Structural and Investment Funds: the European Regional Development Fund (ERDF), the Cohesion Fund (CF), the European Social Fund (ESF), the European Agricultural Fund for Rural Development (EAFRD), and the European Maritime and Fisheries Fund (EMFF).


Making the most of the financial assistance. The objective to at least double the amounts for financial instruments in 2014-20 is ambitious but realistic, argued Vice-President Katainen. The Commission is well aware that one size cannot fit all.


This is why the Commission and EIB will collaborate to discuss the implications for each EU member state with a view to building on the current program experience and fully exploiting the future potential for further use of financial instruments.

Reference from: European Commission, Speech by Vice-President Katainen at the launch of FI-Compass, Brussels, 19 January 2015, in:

http://europa.eu/rapid/press-release_SPEECH-15-3480_en.htm?locale=en

 

Comments on fi-compass. Vice-President Jyrki Katainen, responsible for Jobs, Growth and Competitiveness, said "There is money out there, but investors tell us that they need well-structured projects and access to clear information to reconnect investment finance with a pipeline of trusted projects. We want to fast track the work to set up a technical hub which will provide a one stop shop for advice and support for potential investors. The launch of fi-compass is an important step in the right direction."

Commissioner for Regional Policy Corina Creţu commented: "I welcome the launch of the fi-compass to pool our joint know-how in order to yield the best impact on the ground. Excellent examples serve as inspiration for other countries, in particular those struggling to draw EU funding and ensure its efficient use. I encourage Member States to double the amount of investments channeled through financial instruments in the new programming period."


EIB Vice-President Wilhelm Molterer added: The EIB with its technical, sectorial and country-specific expertise has a potential to encourage more widespread use of financial instruments. This expertise has been widely acknowledged by the Commission and the Member States. We will use it to help recipients of EU funds target projects with high economic viability."

References from: European Commission, Brussels, 19 January 2015. In:

http://europa.eu/rapid/press-release_IP-15-3484_en.htm?locale=en.   

 

This platform will be an important enabler for the EU member states to make use of financial instruments under the European Structural and Investment Funds, as Cohesion policy will play a central part in reaching the objectives of the Investment Plan, in terms of strategic and fruitful investments, job creation and sustainable growth.


Fi-compass, set up by the European Commission and the EIB, is intended to better equip and strengthen the expertise of the managing authorities and stakeholders working with these financial instruments.


EaSI: Memorandum of Understanding. European Commissioners responsible for regional policy; agriculture and rural development;  employment, social affairs, skills and labour mobility; environment, maritime affairs and fisheries, together with the Vice President of the EIB and Chief Executive Officer of the European Investment Fund have signed a Memorandum of Understanding (MoU) on a partnership for technical assistance and advisory services to support the use of financial instruments under the European Structural and Investment Funds and under the Program for Employment and Social Innovation (EaSI).


The fi-compass is the first in a series of actions under the MoU, which will be a 7-year commitment between the Commission and the EIB. The fi-compass advisory platform will provide the EU states and their managing authorities (as well as microcredit providers) with support and learning opportunities for developing financial instruments.


The fi-compass advisory platform will be complemented later in the year with the launch of a ‘multi-regional assistance’ initiative bringing together managing authorities and financial institutions. This initiative aims to support the potential use of financial instruments in investment priority areas that are shared by regions from at least two different EU states.

 

More information on Fi-compass in:

= Financial Instruments under ESIF 2014-2020 and EaSI 2014-2020

Reference: European Commission, Press release IP-15-3484 “EU Investment Offensive: Commission and EIB launch new advisory service on financial instruments”.

See: Planning financial injections into European economy. 20.01.2015.


Single Resolution Mechanism becomes a reality

The Single Resolution Mechanism (SRM) becomes fully operational from January 2016. It will bolster the resilience of the financial system and help avoid future crises by providing for the timely and effective resolution of cross-border and domestic banks.


The EU has already taken significant steps during last two-three years to address the roots of the financial crisis, to ensure that banks are much better capitalised and more effectively supervised while identifying possible risks in the financial system. But despite closer supervision and a greater emphasis on crisis prevention, there may still be cases of banks getting into difficulty.


SRM’s short history. The SRM Regulation established the framework for the EU states participating in the Banking Union when banks need to be resolved.


The Single Resolution Mechanism was proposed by the Commission on 10 July 2013 (see IP/13/674). The regulation entered into force on 19 August 2014.


The provisions relating to the cooperation between the Single Resolution Board and the national resolution authorities for the preparation of the banks’ resolution plans has been applied from the start of 2015.


The SRM implements the EU-wide Bank Recovery and Resolution Directive (BRRD) in the euro area. The full resolution powers of the Single Resolution Board (SRB) have been also intended to apply from January 2016 (see IP/14/2784).


Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union underlined that the EU banking union has had already the tools to supervise the banks within the euro area. The Single Resolution Mechanism will make a system for resolving banks and of paying for resolution so that taxpayers would be protected from having to bail out banks if they go bust.


He stressed that “no longer would the mistakes of banks be borne on the shoulders of the many”.

http://europa.eu/rapid/press-release_IP-15-6397_en.htm

 

The SRM and the banking union. The SRM provides that the Single Resolution Fund (SRF) will be built up over a period of 8 years with 'ex-ante' contributions from the banking industry. EU member states agreed to define some of the rules, particularly relating to the transfer of those contributions from National Resolution Authorities to the SRF, and for the progressive mutualisation of their use over time, in an inter-governmental agreement (IGA).


The IGA was part of the overall compromise reached by the EU states and the European Parliament on the SRM in March 2014, and sits alongside the SRM Regulation (IP/15/6258). It was ratified by a sufficient number of participating states in November 2014.


The EU banking Union consists of 19 members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. If a state outside euro-zone chooses to join the banking union, a state needs to join its all three parts: supervision, resolution and EDIS.

 

The SRM’s functions. The Single Resolution Mechanism works in the following manner:


·         The Single Supervisory Mechanism (SSM), as the supervisor, would signal when a bank in the euro area or established in a Member State participating in the Banking Union is in severe financial difficulties and needs to be resolved.

·         The Single Resolution Board (SRB), consisting of representatives from the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries), the SSM and the European Commission, will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail. The SRB decides whether and when to place a bank into resolution and sets out, in the resolution scheme, a framework for the use of resolution tools and the Single Resolution Fund (SRF).

·         The resolution scheme can then be approved or rejected by the Commission or, in certain circumstances, by the Council within 24 hours.

·         Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme.

·         The SRB oversees the resolution. It monitors the execution at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, directly addresses executive orders to the troubled banks.

·         An SRF was set up under the control of the SRB. It will ensure the availability of funding support while the bank is resolved. It is funded by contributions from the banking sector. The SRF can only contribute to resolution if at least 8% of the total liabilities of the bank have been bailed-in.

 

SRM’s benefits for the EU banks. In the EU banking union, the Single Resolution Mechanism (SRM) allows for:


·         More uniform financing conditions for individuals and businesses, thanks to a single mechanism to deal with the failure of banks irrespective of the Member State of origin, reducing the interdependence between credit supply and the health of public finances;

·         Enhanced preservation of financial stability, with a more predictable environment for consumption and investment decisions, through centralised crisis management for large and cross-border banks, whose disorderly failure could otherwise cause contagion and panic;

·         Reinforced protection of taxpayers via the bail-in tool and if necessary a single resolution fund pooling financial resources for crisis management, to be provided by banks ex-ante, across all participating Member States.

 

More information on SRM in the following websites:

= Banking Union: MEMO/15/6164;

= http://ec.europa.eu/finance/general-policy/banking-union/index_en.htm;

= SRM: MEMO/14/295 and MEMO/14/475;

= http://ec.europa.eu/finance/general-policy/banking-union/single-resolution-mechanism/index_en.htm; and = Single Resolution Board: http://srb.europa.eu/

 

Conclusion: new consultations on the Union’s financial legislation

In September 2015, the Commission invited all interested parties to provide feedback and empirical evidence on the benefits, unintended effects, consistency and coherence of the financial legislation, which was adopted in response to the financial crisis since 2008. The Commission calls it “collecting evidence” through public consultation.


The new idea to make a comprehensive review of financial service’s legislation complements the work started by the European Parliament in 2013 to look at the coherence of EU financial services’ legislation. The EP’s efforts ended in the draft report “Stocktaking and challenges of the EU Financial Services Regulation: impact and the way forward towards a more efficient and effective EU framework for financial regulation and capital markets union”).


These efforts are done in line with the work of international bodies (such as the G20, the Financial Stability Board, and the Basel Committee on Banking Supervision), which are presently also assessing the coherence of the reforms that have been undertaken globally.

The legislative work in the EU institutions have already created a wide range of measures (after the crisis) in order to restore financial stability and public confidence in the financial system. Many of those measures - over 40 in total - were adopted in difficult circumstances and within a short period of time.

The positive result of this period of intensive rule-making has been an improved supervision and market actions, thus the EU financial sector has become more resilient and in a better position to fund the European economy to support jobs and growth.  

Several studies have shown that, see for example: assessment studies carried out by the BCBS and BIS-FSB in 2010, 2011 and 2013 on the macroeconomic impact of stronger bank capital and on liquidity requirements (http://www.bis.org/publ/bcbs173.pdf, and http://www.bis.org/publ/othp12.pdf); on higher loss absorbency for G-SIBs, in: http://www.bis.org/publ/bcbs202.pdf; on OTC derivatives regulatory reforms, in: https://www.bis.org/publ/othp20.pdf; and Commission staff working document SWD (2014) 158 “Economic Review of the Financial Regulation Agenda (ERFRA)”.

 

Striking the right balance. However, the Commission always underlined that it was important that EU legislation stroked the right balance between reducing risk and enabling growth and did not create new barriers that were not intended. Given the different pieces of legislation adopted over the past years and the numerous interactions between them, their collective impact may give rise to some unintended consequences, which may not be picked up by individual sectoral reviews. The new consultations (so-called “call for evidence”) are expected to help the Commission to assess the efficiency, consistency and coherence of the overall EU regulatory framework for financial services. This exercise is an essential part of the Commission's Better Regulation Agenda (see IP/15/4988).


The Commission is looking for evidence and concrete feedback on the following issues:


·         Rules affecting the ability of the economy to finance itself and to grow;

·         Unnecessary regulatory burdens;

·         Interactions, inconsistencies and gaps; and

·         Rules giving rise to possible other unintended consequences.


The complete list of the issues covered in the public consultation see at:  http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/index_en.htm. All interested parties can submit their contributions by 6 January 2016.

 

Capital Requirements Regulation has some effect on the European Market Infrastructure Regulation. Thus, the Capital Requirements Regulation (CRR) review along with other forthcoming reviews already highlighted some unintended effects of legislation adopted in recent years.


According to the Commission, more than 100 review reports are required to be delivered in the following years by the recently adopted regulations and directives in the financial sector.

However, individual reviews may not capture overlaps stemming from cross-sectoral activities, for example.


The call for evidence is therefore seen as a more wide-ranging exercise. Those numerous rules, which are in place to ensure financial stability and investors’ protection, are essential for the functioning and the safety of the system and to restore investors' trust in financial services.


Modern new efforts (in the form of “call for evidence” launched presently) are in line with proceeding along progressive financial regulatory framework in the EU.


However, the Commission is not putting hard-fought recent reforms in question: it has taken essential steps to restore financial stability and public confidence in the financial system.

The Commission sees the EU’s financial sector being now stronger as a result and in a better position to fund the European economy.


However, it is important that EU legislation strikes the right balance between reducing risk and enabling growth and does not create barriers that were not intended. If the legislation has produced unintended consequences, then we should adapt the existing framework.


Commission has acknowledged on several occasions that regulatory coherence and certainty are essential to investor decision-making. 

 

The perspectives. The EU institutions would like to have a clearer understanding of the interaction of the individual financial rules and their cumulative impact on fostering growth in the EU economy. The Commission may consider taking action in specific areas if the evidence gathered clearly demonstrates there are disproportionate costs or deficiencies.

The call for evidence helps the Commission to make informed decisions when it comes to the reviews enshrined in the existing legislation, including the ongoing review of the Capital Requirements Regulation (see IP/15/5347).


The consultation will also allow the Commission to contribute to the ongoing global debate on the cumulative impact and coherence of financial rules.

Reference: European Commission, Memo “EU regulatory framework for financial services”, Brussels, 30 September 2015, in:

http://europa.eu/rapid/press-release_MEMO-15-5735_en.htm?locale=en

 

European capital market is becoming a part of global financial community. According to publications  during 2015 by Bruegel and the Peterson Institute, financial services and banking supervision in the EU and US will create global financial and bank prudential standards.


Foreign experts have considered the following CMU’s parts.


= Specific legislation for financial market segments. For example, for simple and transparent securitization products, the Transparency Directive shall be amended to facilitate access for medium-sized companies to the market; the member states have to change banking licenses for non bank lenders, and frameworks for private placements shall be harmonised. 

= Prudential frameworks shall be reviewed so that regulators should reconsider capital and liquidity requirements for financial sector (and firms) that unnecessarily discourage investment in corporate credit and other market segments. In particular, prudential requirements on insurers and pension funds have to be reviewed; the Solvency II Directive (for insurers) and the Occupational Pension Funds Directive should be reviewed accordingly.


= Financial transparency, accounting, and auditing needs additional measures. For example, banks in their relationships with borrowers can rely on creditworthiness while capital market investors need reliable public financial data. However, public financial information in the EU states is often of poor quality and lack comparability across the EU members.

Hence, a reform is needed to: a) harmonize EU regulation of auditors and create an EU regulator for the largest audit firms; b) establish either a special EU accountancy authority to enforce International Financial Reporting Standards, IFRS or within existing European Securities and Markets Authority, ESMA; c) use IFRS by all unlisted banks to enable consistent banking supervision.  

= In order to provide for supervision of financial infrastructure, the EU shall support the establishment of a global (treaty-based) supervisor and resolution authority with the establishment of an EU-wide supervisory and resolution agency.

= Insolvency and debt restructuring frameworks need changes too. Thus, European insolvency frameworks shall be quicker while protecting employment and private creditor rights in liquidation. Furthermore, differences across national insolvency frameworks hamper the emergence of pan-European credit markets. Though EU’s full harmonization would be unrealistic, even partial harmonization might foster cross-border market integration.

= Some changes in taxation are needed too: differences between national tax regimes for savings products pose a major obstacle to cross-border capital market integration. Member states should seek more convergence in this area, either by unanimity or through enhanced cooperation, as well as simplification and stabilization of national tax regimes. In addition, the EU should build on existing studies and national experiences to rebalance the differential tax treatment, which generally favors debt over equity.

See more on: http://www.piie.com/publications/briefings/piieb14-5.pdf  

 

Dominant share of the global banking system includes 30 groups: 14 in the EU, 8 in the US, 3 in China, 3 in Japan, and 2 in Switzerland. They are classified as global systemically important banks by the Financial Stability Board. Thus, both the EU and the US will remain most vital parts in the global banking jurisdictions. Therefore, the EU is going to take some reforming steps to instigate growth and reverse possible downward economic effect, e.g. excessively low inflation, high unemployment, etc.


The main path of the EU’s reform will address monetary and fiscal policies to be more active in tandem with productivity-enhancing structural reforms to shift the euro area (of which the three Baltic States are members) toward higher growth and stable prices.


Some experts have recommended policies that would replace dangerous fiscal austerity, internal devaluation, and moral hazard (though politically feasible) but, which could lead to the economic downturn.

See e.g. http://www.piie.com/publications/interstitial.cfm?ResearchID=2724

 

European “capital market” is still smaller compared with the banking sector consequently playing secondary role in the expected process of channeling savings into growth-creating investments. The latter could include such financial instruments as venture capital, private equity investment, public equity issuance and initial public offerings, corporate bond issuance, corporate debt securitization, direct purchase of loans by insurers and investment funds from banks, and credit intermediation by specialized nonbank financial firms such as leasing companies or consumer finance companies.


By developing these and other financial market segments, the CMU agenda aims to make Europe’s financial system more efficient and competitive, more resilient thanks to greater diversity, more responsive to monetary policy signals, and more able to respond to the financing needs of a vibrant innovation-driven economy.


The European Commission has underlined that the CMU would cover all EU member states, including the United Kingdom because of its status as host to Europe’s largest financial center in London. Therefore, the EU’s CMU policy should not freeze market structures in their currently underdeveloped form. On the contrary, capital market policy intends to improve the environment for the development of new forms of intermediation: i.e. channeling savings toward productive investment, new financing contracts, with effective control against systemic risk.


More growth-friendly CMU approach should embody the framework aimed at developing efficient financial services with adequate contractual arrangements.


Foreign experts have noted that an ambitious European CMU agenda will face challenges from powerful interests threatened with displacement, e.g. many banks will resist competition from alternative financing channels. Banking advocates have warned against the perils of “shadow banking” and regulatory arbitrage, while ignoring that their own core features of deposit collection and high leverage call for targeted and onerous regulation.


European capital market development could run into deep ideological skepticism from those who view markets with suspicion, a view that is influential among politicians and the general public in some parts in the continental Europe.


European Capital Markets Union is to complement the banking union; the CMU must function as a legislative program of long-term structural reform, while banking union will serve as more actual and potential for a short-term economic impact. The banking union’s issues will be covered in the next information volume.






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