Unblocking the EU s capital markets: The European Commission s Green Paper on the Capital Markets Union A Cicero Group analysis

Transcription

1 Unblocking the EU s capital markets: The European Commission s Green Paper on the Capital Markets Union A Cicero Group analysis FEBRUARY

2 Cicero analysis - New phrase but old idea Contents Capital Markets - EU vs US 4 Europe s capital markets 5 Next steps 6 The Green Paper dissected 7 The phrase Capital Markets Union, may be new but the idea is not. As our timeline shows, better integration of Europe s capital markets is a policy objective intertwined with the creation of the Single Market, an objective rooted in the 1957 Treaty of Rome. A mere 58 years later, Jonathan Hill has taken office with great expectations that in the short and medium term (the next five years), critical barriers to more integrated capital markets will be removed and a more strategic plan to remove longer term barriers will be developed. Unlike other Commissioners then, Lord Hill will have a quantifiable key performance indicator the establishment of a Capital Markets Union by Although integrating Europe s capital markets is an ongoing policy objective, the importance of doing so was brought into sharp relief by the slow pace at which Europe has recovered from the financial crisis. As ECB Executive Board Member, Yves Mersch put it, The euro area economy is like a plane flying on only one engine: bank financing. To increase the speed and stability of the plane, it would be good to add a second engine: capital market financing. The Capital Markets Union can therefore be seen as an effort to diversify and stimulate Europe s financing environment by improving the efficiency and functioning of its capital markets. The reliance on bank financing draws inevitable comparisons with the US, which has a more diverse financing environment and has recovered from the crisis far more quickly. Midsize companies in the US receive approximately five times more funding from capital markets than their equivalents and European companies are currently going to the US to access private placement markets rather than stay in the EU. Rates of saving are twice as high in the EU as the US, suggesting that EU markets are less effective at channelling the vast sums of savings into productive forms of investment. Given that European savings accounts for 20 per cent of Europe s GDP this is a significant sum that can be put to use. European officials are quick to point out that the EU is not the US but it is clear that one of the primary objectives of the Capital Markets Union is to move the EU model in that direction. Treaty of Rome (1957) Founding treaty establishing Free Movement of Capital Single European Act (1987) Provides impetus towards integration of capital markets Treaty of Maastricht (1992) Free movement of capital becomes a Treaty right Giovannini Report (2003) Identified 15 barriers to integrated financial markets Single Market Act I/II (2011/12) Renewal of EU Single Market to boost growth The moniker of Capital Markets Union is also slightly misleading for its similarity to the Banking Union. In contrast to Banking Union, the Capital Markets Union will apply to all 28 Member States and doesn t automatically assume a push towards central supervision of capital markets. This hasn t prevented suggestions from figures such as Jeroen Dijsselbloem, President of the Eurogroup and Roberto Gualtieri, Chair of the ECON Committee that ESMA should take on a greater supervisory role although for now such a move seems unlikely. In contrast to the clear policy objective and actions contained in the Banking Union, today s Green Paper suggests a policy response as broad and complex as capital markets themselves. A set of short term actions gives way to a wide ranging mix of discussion, suggestions and questions. The ambition of the Capital Markets Union is evident throughout the paper and responses are sought on issues that have been frustrating the industry and policymakers for years. The Commission asks for examples of best practice on how to develop risk capital markets or how to encourage institutional investors to invest in a wider range of assets. There are questions on how create a more successful private equity and venture capital regime after the lack of interest in the specific EU venture capital and social entrepreneurship funds. A review of the prudential regime for insurers is also promised to encourage investment in complex and long term infrastructure investments. 2

3 Cicero analysis - New phrase but old idea There is a real sense from the Commission that if a good idea can be presented to them then they will rigorously explore whether it can be made to work. However, the success of the Capital Markets Union project could be limited by the fact that it is in reality, new momentum for tackling old problems. European policymakers have been trying to diversify funding and integrate capital markets for many years. Increasing the range of assets in which institutional investors can safely invest for example is not something that can be achieved through a simple legislative proposal. Barriers to capital market integration are also complex and often impinge on national competences. National insolvency laws, differing tax regimes and pension provision all impede the ability of funds to be accumulated and channelled cross-border. These are all complicated areas which for many different reasons, have remained divided along national lines despite years of integration in other sectors. Consequently the Green Paper represents a process that needs to be both ambitious and realistic. There is a clear demand for ideas from the Commission and a sense of willingness to tackle difficult issues. A valuable role could be played by the newly established unit for the Capital Markets Union to coordinate its actions and proposals across multiple teams and directorates energy infrastructure investment being an obvious example. Jonathan Hill has until the autumn to present his blueprint and until 2019 to create his Capital Markets Union. Much progress can be made but few expect it to be complete by then. Helena Walsh Executive Director James Hughes Account Director Alexander Kneepkens Senior Account Executive Sebastian Damberg-Ott Account Executive 3

4 Capital Markets - EU vs US Banking system assets 284% VS 90% EU 284% of GDP vs US 90% of GDP Source: EBF, 2014, International Comparison of Banking Sectors Personal savings rates 10.56% VS 4.90% EU 10.56% vs US 4.90% Source: Trading Economics, 2015, European Union Personal Savings Bank vs Market based financing 70% 70% 30% 30% VS EU 70% Bank loans & 30% Market financing vs US 30% Bank loans & 70% Market financing Source: EBF, 2014, Capital Markets Union: what is at stake? Venture capital market $7.4bn VS $33.1bn EU $7.4bn (15% of global market) vs US $33.1bn (68% of global market) Source: EY, 2014, Adapting and evolving 4

5 Europe s capital markets Supply of funding Access to finance Mobilising pensions and savings Expanding range of assets for institutional investors Simplifying investments in SMEs Facilitating infrastructure financing Promoting crossborder retail investment Stimulating non-bank finance fora Real economy SMEs Mid-Cap Large Companies Promoting new forms of finance, e.g. securitisation, covered bonds, crowdfunding Improving the investment chain Harmonised trading environment including liquidity Improving company mobility Common approach to insolvency Better reporting of market data Easing collateral flow Promoting supervisory convergence Sound financial infrastructures 5

6 Next steps EP plenary vote on ELTIFs March Publication of the consultations on the Prospectus Directive and Securitisation 18 February Publication of the Green Paper 18 February Q2 Q CMU consultation deadline 13 May EC Conference on CMU Summer Evaluation of Insolvency Framework Legislative proposal on Resolution of CCPs Delegated Acts on SME Growth Markets (MiFID II) Introduction of MiFID II / MiFIR 2017 Q3 Launch of Target 2 Securities Consultation on EU Covered Bond Framework Q4 Publication CMU Action Plan EC Work Programme December EIOPA advice on single market for personal pension products February Solvency II takes effect 2016 Capital Markets Union in place

7 The Green Paper dissected Area Initiative Status Review the Prospectus Directive Consultation published Priorities for early action Set up a framework to enable a comprehensive approach to securitisation in the EU Set up a framework for common minimum and comparable information for SMEs to improve SME credit information Set up a framework for private placements to take away barriers including insolvency laws and lack of standardisation in processes, documentation and information Expand the take up of ELTIFs Consultation published EC will hold workshops Evaluating market-led approach Increase issuance of quoted shares for large companies Incentivise long term investments and infrastructure investments in addition to the existing EFSI initiative Develop simplified, common and high quality accounting standards tailored to companies listed on MTFs Access to finance Set up a central EU-level website for infrastructure projects Set up framework for covered bond market by adopting best practices Consultation coming in 2015 Consider setting up framework for standardisation in corporate bond market, either being market led or by regulatory intervention Monitor industry framework to Green bonds Review possibilities for a cross-border approach to crowdfunding 7

8 The Green Paper dissected Area Initiative Status Supply of funding Identify policy measures to incentivise institutional investors to invest in a broader range of assets Institutional investors Review prudential rules for lower risk debt and equity investments Institutional investors - Amend prudential requirements for pension provision through the IORP II Directive Institutional investors Examine a standardised product (29th regime) to create single market for personal pension provision Institutional investors Explore how to widen range of market participants in EuVECA and EuSEF and potentially remove the EUR 500 million cap on size of investors Examine what measures can be taken to create a better environment for business angels, venture capital and initial public offerings Explore the barriers to entry for new and innovative financing vehicles such as peer to peer lending Retail investors Incentivise standardised or simple financial products to restore consumer confidence in financial markets Retail investors Enhance cross-border competition in retail financial services, especially in electronic and mobile financial services Retail investors Preparatory work on how a single market for retail financial services can deliver more benefits to consumers International investors - Facilitate direct marketing of EU investment funds and other investment instruments in third countries International investors Increase the attractiveness of EU markets to international investors Legislative proposal in progress 8

9 The Green Paper dissected Area Initiative Status Enforcing the single rulebook and avoiding gold-plating to prevent divergent implementation of EU law Explore a single framework to govern the treatment of cross-border investment Act on the possible improvements on the ESAs set out in the EC s report on the functioning of the ESAs Use the ESAs to prevent national supervisory regimes from creating differing investor protection standards and barriers to cross-border investments Consider appointing commercial entity to run consolidated tape if market-led efforts fail Improving the investment chain Review if more work is needed to improve trade data and reporting Set up common IT approaches for certain reporting requirements under EU legislation involving national authorities and ESAs Proposal for recovery and resolution of systemically relevant financial institutions such as CCPs Potentially remove barriers to facilitate flow of collateral throughout the EU Legislative proposal to be published Assess need for changes to the securities ownership rules Examine potential improvements to market liquidity Examine legal certainty in cross-border transfer of claims Report planned in 2015 Review company law on cross-border establishment, operation of companies and company mobility 9

10 The Green Paper dissected Area Initiative Status Improving the investment chain Review conflict-of-law rules on the internal functioning of companies and consequences for third parties of transfers of claims Evaluate the EC Recommendation on a new approach to business failure and insolvency to prevent further divergence of national insolvency frameworks Examine the tax treatment of cross-border investments by life insurance companies and by pension funds in real estate Will take action if discriminatory tax rules are found on cross-border investments by life insurance companies and by pensions funds in real estate at a later stage Simplify withholding tax relief procedures related to post-trading and link in to OECD TRACE project Examine the treatment of debt and equity and consider harmonised definition Evaluation planned in 2015 Consider targeting tax incentives for R&D expenditure at young innovative companies Consider measures to increase the use of modern technologies and integrate the benefits of digitalisation 10

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