Jonathan HILL - Member of the European Commission, responsible for Financial Stability, Financial Services and Capital Markets Union
Finance Watch Conference: The long-term financing agenda – the way to sustainable growth?
Good afternoon ladies and gentlemen. I am glad to be here and hope that you have had a good day today.
First, let me wish Christophe Nijdam well in his new role as secretary general of Finance Watch. His is an important job for an important organisation. We need Finance Watch to bring together a range of groups' interests in financial regulation. We need your input to the Commission's work and I know how much my colleagues have appreciated your contribution to our many initiatives, expert groups and consultations over the last few years.
We need to hear the views of different parts of the market; different sections of society. And we all need to remember that the finance industry is here to serve consumers, savers, businesses and the wider community. Which is why Finance Watch was one of the very first organisations I met when I became Commissioner.
All of us want to encourage a financial sector that is built on strong foundations, has the right values and which can underpin the economic growth that Europe so badly needs.
Many of you in this room were involved in the development of the new rules introduced over the last five years to govern the financial sector. You helped shape regulation that was essential to respond to the financial crisis and to help restore financial stability. It was a remarkable achievement, made more so by the fact that it had to be done while the fires of the financial crisis were raging.
We need to remain focused on the threats to financial stability because financial stability remains the prerequisite to growth. That is why I am 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.
But I think we must recognise that the nature of the threat we face has changed. Today, the lack of growth is the biggest threat to stability. GDP growth across the EU is anaemic: only 0.3%. There are nearly 25 million people unemployed. In many countries, there are genuine fears for a lost generation. And where the lack of growth and opportunity persists a sense of hopelessness is creating a deeply worrying and corrosive cynicism about the ability of democratic politics to deliver. So there is not only an economic but a democratic imperative to get our economies growing again. To build trust and restore hope for 500 million Europeans.
So we need both financial stability and growth: we need sustainable growth.
That is the new Commission's number one priority. It is why President Juncker's first act as Commission President was to launch the 315 billion euro Investment Plan. We all know that jobs and growth will come from the single market and trade, not from politicians. But this plan can help by taking away some of the risk of investing in long-term projects; by supporting viable projects that might otherwise not have found investment; and by encouraging Member States to remove red tape, regulatory bottlenecks and other barriers to investment. Providing the right conditions for the economy to get moving again.
The relentless focus on jobs and growth also determines how I approach the decisions it's my job to take. I will look at all regulation through the prism of jobs and growth. Given that the worst of the financial crisis is behind us, we should not expect to have to legislate so much in the future: you should not anticipate anything like the volume of new legislation that the crisis called for. And after those five busy years of trying to 'moor the boat in a storm', we should also ask ourselves: have we always struck the right balance between reducing risk and encouraging growth? If the evidence tells us that we haven’t always got it right, if the rules are not proportionate to the risks presented by different types of operator, then we should be ready to look at regulation again.
Role of finance in sustainable growth
I know that the issue of sustainable growth has been at the core of today's conference.
To me, sustainable growth means an environment in which companies can expand, entrepreneurs can reach new markets and businesses can create more and better jobs. So that young people can have hope for their future and all of us can thrive.
A well-functioning, stable financial system is an essential pre-requisite for growth. We do not make the economy stronger by making our financial services weaker. We need to move from a position where the industry is seen as being part of the problem to one where it is seen as part of the solution.
How can I in my mandate help to achieve that? How can financial services contribute to growth? I think there are two important ways in which they can help.
The first is through a sound and stable banking system; one that is able to lend, keep people's savings secure, process payments and generally deliver the services that consumers and businesses need every day. A huge amount of work has already been done to make sure that the right framework is in place to make that happen.
I will continue to work hard to make sure that things stay on the right track. This means delivering detailed rules so that the reforms of the banking sector can be put into practice in day-to-day operations. And looking at how the rules are being implemented and applied on the ground.
I want to ensure compliance does not become a box-ticking exercise but a real change in culture. And, if we find wrongdoing; if professionals are found to have defrauded or deliberately misled unsuspecting customers, the system should come down on them like a ton of bricks.
The second way is through well-functioning capital markets. These can spur growth through boosting confidence in Europe as a place to invest.
Well-functioning capital markets also help encourage greater diversity in funding, which reduces concentration of risk so they not only free up capital for growth but also support and strengthen financial stability.
After all, it's important to remember that "capital markets" are not some abstract construct – they are someone's pension savings, someone's 'rainy day' money which is channelled to growth.
Capital Markets Union: what is it (and what is it not)?
Building a single market for capital will help money flow through the EU to where it can be most productive. Its aim at its most simple is to link savings with growth. This is a project for all 28 Member States.
My ambition is to help unlock the capital around Europe that is currently frozen and put it to work in support of Europe's businesses, particularly SMEs.
I'd like to explain to you briefly what capital markets union is intended to be. And, perhaps equally, what it is not.
With the Capital Markets Union, we want to remove the barriers that stand between investors' money and investment opportunities; clear obstacles that are preventing those who need financing from reaching investors; and make the system for channelling those funds – the investment chain – as efficient as possible.
Free movement of capital was one of the four fundamental principles on which the European Union was built. But fifty years on from the Treaty of Rome, we still don't have a fully functioning single market for capital. The market remains fragmented, largely along national lines. Overcoming that fragmentation could have significant benefits.
Just to take one example, if our venture capital markets were as deep as the US, as much as 90 billion euro more in funds would have been available to companies in the period between 2008 and 2013. Think of all the innovation that that could have sparked; all the new products and services that could have been dreamed up; all the new jobs that could have been created if that funding had been there.
So our goal with the Capital Markets Union is to make Europe more attractive to inward investment. We also want to create more financing opportunities for SMEs and infrastructure projects. Spread risk more effectively to those who can bear it. And deepen integration across borders within the EU, increasing competition.
What Capital Markets Union is not is an attack on banks. It is not about punishing one sector of the industry to reward another. We recognise very clearly the role that the banking system plays in Europe's economy and the contribution that banks make to local communities. Indeed we envisage banks continuing to be an important distribution channel for market funding. Capital Markets Union is rather about growing the overall pot so that everyone benefits: banks, capital markets and, most importantly, firms who find more sources of funding. And it is about giving choice to companies on where and how they want to get financing.
Equally, Capital Markets Union is not another Banking Union. It will be very different from, but complementary to that project. Banking Union's focus was on breaking the link between bank failures and sovereigns through a single system of supervision and resolution in the euro area. That will provide a platform of stability and confidence to underpin development of a Capital Markets Union across all EU 28 Member States. Capital Markets Union is a response to a different problem – that of high levels of savings not finding its way to productive use in the economy.
Capital Markets Union is also not just for the big players or big companies. Quite the opposite. It is about giving smaller businesses a wider range of options for their financing, so they are not only reliant on their local bank branch, but can consider options like listing on a growth market or attracting equity investment from outside their home countries. And it is about offering attractive alternatives to retail investors who want to save for their retirement and want to spread the risk between a number of different vehicles. So we think it will be a great opportunity for the smaller players, on both ends of the investment chain.
And finally, Capital Markets Union will not mean a return to the bad old days of misregulation and excessive risk-taking. It will be built on firm foundations of financial stability, namely the consistent implementation and enforcement of the single rulebook that has largely been put in place in recent years. We want to enable the economy to capitalise on a more diverse, more transparent and more resilient range of funding while remaining alert and vigilant to emerging risks.
Features of Capital Markets Union
So how, concretely, will we build a Capital Markets Union? Well, it will not happen overnight. It is a long-term project that will require sustained effort over many years. And it will need to be approached from many different angles – securities laws, investment restrictions, tax treatments, insolvency regimes. These are all issues that we have been grappling with in Europe for decades. But the urgency of our economic need is more pressing than ever so we should not shy away from addressing each of them.
In the meantime, we have identified a number of areas where we can make early progress in the coming months to encourage investment and overcome obstacles.
The first will be proposals to build a market for high-quality securitisation. Highly transparent, simple and standardised securitisation instruments can help free up banks' balance sheets so they can lend to households and businesses. Again, we have no intention of returning to the unhealthy practices of the past. So far as the highly complex, opaque and risky securitisation instruments such as subprime instruments are concerned – the door will remain firmly closed. But we need to be clear on where the problem was. The flawed products that were the catalyst for the financial crisis in the US must not be allowed to return.
However, European securitisations actually fared very well in the crisis. So why is it that securitisation levels in the US have completely recovered while EU securitisations remain depressed? This is having a negative effect on our economy. If SME securitisation could be returned – safely – even to half way back to the levels they were in 2007, this could be equivalent to some 20 billion euro of additional funding.
We in the Commission are not alone in being interested in breathing new life into securitisation markets. Both the European Central Bank and the Bank of England have consulted recently on high quality securitisations. They too are interested in making sure new securitised products adhere to higher standards. And it is a subject being discussed at the international level.
I understand Finance Watch’s concerns regarding the potential for increased risk if there were to be a revival of securitisation, and share your view that we have to be vigilant towards this and other emerging risks. One of the steps we are taking to help safeguard against these risks is the Securities Financing Transaction Regulation. This Regulation will increase transparency, so that investors and regulators understand how and where such transactions are being used, allowing us to act if needed.
We intend to review the Prospectus Directive to make it easier for firms, particularly smaller ones, to access markets and reach investors across borders, while making sure that investors get all the information they need about what they are investing in.
We will start work on improving the availability of SME credit information to help bring loans to smaller firms.
We will be supporting the take up of the new European Long-Term Investment Fund to channel investment in infrastructure and other long-term projects. In this regard, we will move fast on the legislative measures that are needed to implement the legislation on these new funds. We will also assess whether it would be appropriate to extend the advantages currently available for national regimes to ELTIFs and will be encouraging EU institutions like the European Investment Bank to use ELTIFs to channel investment.
And we will be supporting the industry in its development of a pan-European private placement regime. Private placements can offer firms a cost-effective way to raise funds; can broaden the availability of finance for medium to large unlisted companies and could potentially support infrastructure projects.
Ladies and gentlemen, I think we all share the same broad goals, namely to create a supportive environment in which funding can start flowing again and be put to productive use. One in which our businesses, especially the small ones, can grow and expand. And above all, one that will encourage job creation.
Capital Markets Union will be one element in building that more growth-enhancing environment. It will help promote investment in the economy. To have a long term impact on the ground, that extra investment needs to be accompanied by sustained efforts by Member States to implement the structural reforms their economies also so desperately need.
We are only at the beginning of the process of developing the Capital Markets Union. I will be travelling around Europe in the next couple of months, meeting as many interested parties as possible to hear their views.
And we will be launching a green paper on our plans within the next few weeks. You have a crucial contribution to make. So I strongly encourage all of you in this audience, and the organisations you represent, to contribute so that we can get as rounded picture as possible of the priorities and concerns of all users of the financial system.
For our economies; for our democracies; it is imperative that growth returns to Europe. It is up to us to prepare the ground, provide a supply of water, and ensure that when the seeds are planted, they can flourish.