Member of the European Commission, responsible for Financial Stability, Financial Services and Capital Markets Union
13th Annual EU Financial Services Conference: "A new direction for financial services"
Good morning ladies and gentlemen. It's a great pleasure to be here and to have the chance to take part in a conference that has become a familiar part of the financial services landscape.
Since your last conference, there has been a new European Parliament, a new European Commission … and, I hope, some new opportunities for the European economy. So it is a good time to talk about new directions for financial services. I want to talk this morning about the direction of the new Commission, the direction I want to take in my portfolio, the direction of the Capital Markets Union, and a few words about the direction of international regulation.
The new Commission
So, the direction of the new Commission. In essence, we want to do fewer things better. We have a new structure of Vice-Presidents which is helping to underpin more joined-up thinking and to concentrate on a smaller number of political priorities. Nothing is bigger than the priority of jobs and growth. And with 24 million Europeans out of work, I think we need to have a real sense of urgency. That is why our first act, just three weeks into the life of the new Commission, was to launch a 315 billion euro Investment Plan.
It is also why we will press ahead with free trade agreements like the Transatlantic Trade and Investment Partnership. And it is why we are launching a major new drive on the single market – in energy, digital services, and my own area of capital markets. Bigger markets, more competition, more trade should all help the economy and generate jobs.
We are also bringing a new approach to regulation. Just before Christmas we announced the Commission Work Programme for 2015. Under the leadership of Frans Timmermans, each Commissioner had to make the case in front of our colleagues as to why we needed new legislation. The result? This year we will be bringing forward only one-fifth of the amount of new legislation as in a typical year in previous Commissions. And we will also be reviewing over two and a half times as many existing laws as was usual in the past. What's more no Commissioner will be able to make a new legislative proposal unless it is first signed off by Frans. So we have a number of new filters or checks and balances to make sure that we stay focused.
As far as my portfolio is concerned, I will try to apply these same principles.
In the past few years we have seen lots of new legislation – an essential response to the financial crisis and our need to restore financial stability. As a result, we have more solid foundations and Europe is growing again.
But the speed of the recovery is slower than we would like. And if the greatest threat to financial stability in the past was the financial crisis, now I believe it is the lack of jobs and growth. That is why, like the Commission as a whole, I will think about what I do through that prism.
So, fewer new legislative proposals in future. More focus on bedding-in the major reforms of recent years and seeing that they are properly implemented. Thinking about the cumulative effect of different pieces of legislation and checking that there have been no unintended consequences on investment. Making sure that legislation is proportionate and takes into account the different business models we have in our diverse financial landscape.
I don't want to burden smaller, lower risk institutions with the same requirements we need for bigger, riskier ones. This approach follows steps that the Commission has already taken. So, in the Capital Requirements Regulation, we adapted some of the international rules to take into account the specific circumstances of saving and cooperative networks, and to make it more attractive to make loans to SMEs. We took a similar approach in the recent liquidity coverage ratios where we again sought to reflect the different banking systems across Europe.
Looking ahead, I am keen to build on this policy of differentiation. For instance, we will need to decide by the end of 2016 whether we should introduce a binding leverage ratio or ratios in the EU. We will also need to assess the impact of net stable funding ratios on the diversity of business models in the European banking system. In both of those areas, differentiation would be crucial. Beyond that, we will need to see that the Financial Stability Board's Total Loss-Absorbing Capacity guidelines are coherent with existing EU rules in the Bank Resolution and Recovery Directive.
We will also need to complete the work started in the last Commission to make the financial system stronger and more stable. The building blocks of the Banking Union are there, but to be effective, Member States need to put the rules into effect. There are also some proposals which are still being considered by the co-legislators, notably on Money Market Funds, benchmarks and structural reform: I hope they can be concluded swiftly, both to avoid regulatory uncertainty and to strengthen financial stability. My approach to those negotiations will be pragmatic: I want agreements that deal with the sources of risk, but do not impede financing of the wider economy. One new legislative proposal I will make is for an effective resolution for non-bank financial institutions, and for clearing houses in particular. Having concentrated activity into these large, financial infrastructures, we need to make sure we have a framework in place (as there is for banks) to manage their recovery or default.
I also want to think more about how we can deliver benefits from a single market in financial services directly to consumers. To think about financial services from their point of view and identify barriers which prevent them from benefiting from better competition. In the coming months, I will be launching a consultation seeking to understand the barriers that persist within the Single Market and how we might help to give consumers access to more products, better services and keener prices.
Capital Markets Union
The third new direction I mentioned is building a single market for capital: a Capital Markets Union.
Free movement of capital was one of the four fundamental principles on which the European Union was built. So in some ways this is a familiar direction. But I do believe we have a new opportunity to make progress and get capital markets working better. If we can do that, the prize would be considerable.
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 between 2008 and 2013. Think of the innovation, the new services, the new jobs that could have been created if that funding had been there, businesses that could have developed and grown in Europe rather than being developed and grown in the US.
A single market for capital would make Europe more attractive to inward investment. It would create more financing opportunities for SMEs and infrastructure projects. It would encourage more long-term investment. Europe of course already has a financial network; but now it needs better connections to make that network become faster, more developed and more efficient.
Capital Markets Union is about complementing the role of banks, not displacing them. In some countries, in some markets, bank financing is working well. But in others, it is not. Where banks are not lending, our start-ups and our SMEs are struggling. And in all countries, more options for financing at different stages in the life-cycle of a business could help boost growth.
Financing of long-term investment
My starting point will be to try to make existing markets work better, to take a number of pragmatic, incremental steps to get funding to where it is needed most: to long-term investment projects, for example to infrastructure and to our SMEs.
Let me say a word about what I hope to see emerge in the coming years on each of these.
With the support of the ECB and the Bank of England, we want to get the market for securitisation going again in Europe. This could make a real difference to long term investment by broadening the investor base to include more long term investors such as insurers and asset managers. To do it, we are looking at how we could set up a framework for the development of an EU market that singles out a category of highly transparent, simple and standardised products.
We also want to support institutional investors to invest in long-term projects. I do not think that it is for governments or indeed European institutions to try to force such a change. But we do think that there is a role we can play in supporting such developments - for instance, insurance companies were given a number of incentives to invest for the long term in the detailed rules introduced for Solvency II last October.
We could also step up efforts to create a single market for personal pensions – a 29th regime - which would help mobilise more personal pension savings for long-term financing.
As far as banks are concerned, many of the detailed rules implementing the capital requirements take into account the needs of long-term finance. But we will produce a report under the review of the Capital Requirements Regulation to assess how appropriate the existing rules are.
Private placements have the potential to offer investment opportunities to long-term investors, and could broaden the availability of finance for infrastructure projects. A group of industry bodies recently launched an initiative to encourage the development of the European private placement industry. I very much welcome that, not least because I do not think that we always have to reach for legislation as a first option.
Financing of infrastructure
The Capital Markets Union also gives us a framework within which we could make a difference to our infrastructure, to the roads, the bridges, and the broadband networks that connect our continent. It can do this by providing incentives to institutional investors to put their money in infrastructure.
Two examples of things we are doing:
First, the European Long Term Investment Funds or ELTIFs provide an ideal vehicle to provide this type of incentive, both for the new European Fund for Strategic Investment and for insurers. The European Parliament agreed to ELTIFs recently and I want to see ELTIFs up and running as soon as possible.
Second, the work of the task force on the investment plan will help increase the transparency of infrastructure projects, which should make it easier for investors to identify strong projects in which to invest.
Our intention is to make amendments to the detailed rules on Solvency II in both these areas, that is to make provision for ELTIFs, and to give insurers more ways of getting involved in infrastructure projects.
Helping SMEs get access to finance
CMU can also help SMEs to get access to finance. This is not a new goal and member states have been active in a number of areas. Some have taken initiatives to try to channel funding more effectively to SMEs, and we are looking at the experience that has been gained under such schemes. But if we can get it right, the benefits of doing this at the European level could enable us to generate valuable multiplier effects.
We will also be focusing on SME lending in our forthcoming assessment of the impact of capital requirements. And in the context of international standards, we will argue that particular attention should be paid to the appropriate calibration of SME lending capital requirements. Banks could help in one area, namely in giving better feedback to SMEs and pointing small businesses towards alternative types of financing when they consider a loan is not right for them.
Other SMEs, I recognise, may want to have other options, like listing on a growth market or attracting venture capital. We need to help raise SMEs' awareness of alternative financing opportunities. And companies that decide to take the plunge and offer securities on a market should not be deterred from doing so simply because of the paperwork involved. That is why we want to revise the Prospectus directive so that it becomes easier for SMEs to fulfil their listing obligations, but in such a way that investors are still well informed about what they are buying. We recently launched a consultation on this and look forward to getting practical advice on how we might improve things.
Although there is good basic information out there on companies and what they do, potential investors can't easily assess the credit risk that they might present. So we will look at whether there is a way of increasing standardised data for credit assessment – without tying all SMEs up in a new tangle of red tape.
And finally, we are considering how we could boost the "ecosystem" in Europe for venture capital. This might include adapting the rules for European Venture Capital funds and European Social Entrepreneurship Funds to expand the categories of fund managers able to offer these funds.
So, just in these three areas, I hope you will see that what the Capital Markets Union project offers is an opportunity. An opportunity for banks as important intermediaries of market-based funding. An opportunity for investors to increase their options for investment. An opportunity for Europe to widen access to new channels of funding for SMEs and infrastructure projects. An opportunity, in other words, to finance growth.
Building a single market for capital will be a long-term project. It is ambitious, and it will not be easy. We are going to have to revisit some age-old problems with fresh eyes. But I believe these are also areas where we can make early progress, identifying barriers one by one, and working out ways to overcome them.
To do that, I will need the input of Member States and Parliamentarians but also from investors and those who want investment, European businesses which want to grow. This will be a long-term project that we will need to build step by step from the bottom up. I will come forward with an action plan later in the year setting out more detail.
The international dimension
We can't talk about growth and EU competitiveness and not talk about the international picture. Having a vibrant EU market that attracts capital from the outside is essential, as is the ability for businesses to operate globally under coherent regulation.
When the crisis hit, world leaders put the G20 at the forefront of a coordinated international response. It was the FSB which established the core elements of a new global financial system. In the EU, we have supported that process and we know the importance of international consistency.
Nevertheless, the international rules and standards are not always very detailed. And they must be put through the democratic legislative process in each jurisdiction.
We need to ensure that the detailed domestic rules work well together. Loopholes and overlaps will not provide stable and resilient financial systems. They make life difficult for global businesses, imposing costs on them and creating opportunities for people to game the system through regulatory arbitrage.
This is where the work at bilateral level comes in. The level of interconnectedness between the EU and US in particular means that this relationship is especially important. That's why I believe that we need to create a closer and deeper regulatory partnership through TTIP. I don't want or expect identical regulation. But better cooperation would give us the framework within which to consult each other at an early stage in the regulatory process. By implementing international standards in a consistent way, and by having close supervisory cooperation, the EU and the US would be able to rely on each other's rules as long as they achieved the same outcomes.
This is in the interests of both EU and US markets, and important to financial stability. We would provide a larger and more efficient market place for financial firms, giving them greater capacity to provide finance for the economy. Early troubleshooting and greater supervisory cooperation would mean we could maintain financial stability more efficiently. And we would solidify the leading role of the EU and US in financial regulation.
Based on the solid foundation of financial stability built up over the last 5 years, I believe that we can look to the future with greater confidence. The four new directions I have talked about today – a new direction for the Commission, my own approach as a new Commissioner, the Capital Markets Union and the need for international coherence and consistency in financial regulation – all come together to deliver one overriding objective: creating the right conditions for jobs and growth.
That is the objective which will be at the forefront of my mind as I go about my job – whether that is completing the financial regulatory framework, developing new proposals, thinking about the international dimension, or building a single market for capital.
That is the lens through which I will look at everything I do.