seminar: "towards a capital markets union"

Vice President, Analistas Financieros Internacionales

Road to CMU: developments in

financing since the crisis

Ángel Berges

1 Financial structures and developments

during the crisis: Europe versus the US

2

1. Financial structures and developments during the crisis: Europe versus the US

Higher weight of bank lending in Europe relative to capital markets in US

Source: Afi, Afme. 3

Euro Area funding model (% of GDP) US funding model (% of GDP)

Increased importance of external financing relative to own funds in European companies

Source: Afi, Afme4

1. Financial structures and developments during the crisis: Europe versus the US

The banking sector is larger in Europe than other advanced economies

Source: Afi, IMF.5

Size of the banking sector and capital markets in EU

and other jurisdictions (% of GDP)

1. Financial structures and developments during the crisis: Europe versus the US

On top of these structural elements, bank lending has been on a downward path…

Source: Afi, Afme6

1. Financial structures and developments during the crisis: Europe versus the US

…especially in those economies where recourse to alternative sources of financing is limited

Source: Afi, ECB.7

1. Financial structures and developments during the crisis: Europe versus the US

Evolution of GDP growth in US and Eurozone (2007=100)

90,0

92,0

94,0

96,0

98,0

100,0

102,0

104,0

106,0

108,0

110,0

2007 2008 2009 2010 2011 2012 2013 2014

US Euro zone

Does it matter for economic recovery?

Source: Afi, Eurostat 8

1. Financial structures and developments during crisis: Europe versus the US

2 Capital Market Union and SMEs:

chicken and egg problem

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2. Capital Market Union and SMEs: chicken and egg problem

A business structure dominated by SMEs…

SMEs and large enterprises: number of enterprises and employment by firm size in Europe and Spain

Micro Small Medium SMEs Large Total

Number of enterprises

Spain number 2.984.727 107.784 18.011 3.110.522 3.839 3.114.361

Spain % 95,8 3,5 0,6 99,9 0,1 100

EU-28% 92,4 6,4 1,0 99,8 0,2 100

Source: Afi, ipyme.

Employment

Spain % 32,6 18,8 14,8 66,0 34,0 100

EU-28 % 28,6 20,7 17,4 66,6 33,4 100

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In the case of Spain, micro firms with less than

nine employees are dominant. Medium-sized

firms have very little representation.

This makes resolving the Spanish case

distinct from the German fixed income model

based on medium-sized firms.

Distribución de empleados por tamaño de empresa

(2012)

(%)

Source: DIRCE, European Commission Annual Report on SMEs in the EU 2012. 11

2. Capital Market Union and SMEs: chicken and egg problem

Distribution of employees by size of firm (2012)

…in which micro firms are the most prevalent

Weaker capital structure and difficulties to attract equity (SMEs)

SMEs’ total equity vs total liabilities (%)

Source: Afi, BACH, EVCA, Pitchbook

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012 2013 2014

US total funds raised ($) EU total funds raised (€)

36,648,4

34,0 32,1 28,6

0

10

20

30

40

50

60

70

80

90

100

DE ES FR IT PT

Total Equity Total Liabilities

Private equity funds raised (billion $/€)

Dificultades para obtener capital:

2. Capital Market Union and SMEs: chicken and egg problem

12

13

The weight of SMEs in European stock markets

2. Capital Market Union and SMEs: chicken and egg problem

3 Barriers to overcome

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i. Create a genuine Capital Markets Union

Objectives of CMU

1. Improve access to financing for all businesses across Europe (in

particular SMEs) and investment projects such as infrastructure;

2. Increase and diversify the sources of funding from investors in

the EU and across the globe; and

3. Make markets work more effectively and efficiently, linking

investors to those who need funding at lower cost, both within

Member States and cross-border. 3,5x2,6x 2,3x 2,5x

1,8x

3,9x

0,9x 2,8x 2,8x

2,9x

2,3x

4,1x

0,0x

1,0x

2,0x

3,0x

4,0x

5,0x

6,0x

7,0x

8,0x

US EU Spain France Germany UK

Fixed income + Capitalisation Banking Assets

Size of capital markets as a proportion of GDP

Source: Afi, FMI

3. Barriers to overcome

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b. Eliminate fiscal bias towards debt financing

Effective average tax rate (EATR) as a percentage of debt and equity

financed new corporate investment

Source: Afi, ESMA, EC

• The favourable treatment of debt has created a bias

towards debt financing.

• Of the 23 million SMEs in the EU, only about 11.000 are

listed on a stock exchange or traded on exchanges or

Multilateral Trading Facilities (MTFs) (EC, Economic

Analysis accompanying the CMU Action plan)

• On average, at the EU level in 2014, the cost of capital for

equity was around 45% higher than the cost of capital for

debt due to taxation (EC, Economic Analysis

accompanying the CMU Action plan)

3. Barriers to overcome

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c. Harmonise the treatment of insolvencies

Harmonizing insolvency procedures would:

Reduce fragmentation amongst MS and help to lower barriers to cross-border investment

Lower the costs to investors of having to analyse different national insolvency laws

Guarantee and ensure the effectiveness and quality of insolvency proceedings.

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

IR BE FI NO DK UK NE GE SP US IT FR LU PT SW CR LI PO GR

Time (years) to resolve insolvency Recovery rate (%)

0

10

20

30

40

50

60

70

80

90

100

NO FI BE NEUK DK IR GE US FR SW PT SP CR IT PO LU LI GR

Source: Afi, World Bank

3. Barriers to overcome

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Towards aCapital Markets Union

Antonio J. Zoido

Chairman and CEO

- 2 -

2015

Towards a Capital Markets Union

November 5th

A LONG PROCESS

THE CAPITAL MARKETS UNION

- 3 -

2015

Towards a Capital Markets Union

November 5th

EU US

Capital markets structure - EU vs. US (end December 2013)

Source: ECMI Statistical Package (2014)

400%

300%

200%

100%

0%

GD

P (

%)

Financial institutions debt securities

Corporate debt securities

Government debt securities

Public equity markets

- 4 -

2015

Towards a Capital Markets Union

November 5th

NL DK UK SE ES FR IT PT DE PL

Stock market capitalisation and outstanding debt securities(end December 2013)

400%

300%

200%

100%

0%

GD

P (

%)

Debt securities

Stock market

Source: ECMI Statistical Package (2014)

- 5 -

2015

Towards a Capital Markets Union

November 5th

EU US

Total number and average size of mutual funds in the

EU and the US (Q3, 2014)*

2,000

1,500

1,000

500

0%

Siz

e(E

UR

mn

)

Average size (lhs)

Number funds (rhs)

* Funds of funds are not included, except for FR, DE, IT, LU.

Source: EFAMA, Intenational Statistical Release (2015)

- 6 -

2015

Towards a Capital Markets Union

November 5th

Composition of the financial portfolios of EU and US households(%, end 2014)

Data Sources: EU and Us anual accounts data released

by Eurostat and the US Federal Reserve

US

EU

0% 5% 10% 15% 20% 25% 30% 35% 40%

Other financial

assets

Debt securities

Investment fund

shares / units

Shares and other

equity

Currency and

deposits

Insurances and

pension schemes

Note: This and more in-depth data analysis is included in a forthcoming report of a Group of experts put together by CEPS

to issue recommendations on how to créate a European market for capital

- 7 -

2015

Towards a Capital Markets Union

November 5th

Challenges facing the Capital Markets Union

• Regulation

• Supervision

• Market-related issues

Accounting standards

Structure, functioning

Stock exchanges

Some particular cases

- 8 -

2015

Towards a Capital Markets Union

November 5th

Plaza de la Lealtad, 1 · 28014 Madrid

Jung LichtenbergerDeputy Head of Capital Markets Union Unit

Directorate General for Financial Stability, Financial Services and Capital Markets Union (FISMA)

2

EU needs more investmentActual and potential GDP in the EU and US

3

Bank lending is pro-cyclicalEU bank lending to business (2008-2014)

4

CMU in an nutshell

Boostinvestment

into EU economy

More choice

Integration

5

• Stable financial system

• greater funding options cushion the impact of a contraction in bank lending

• more developed equity markets supports long-term investment

• Integrated financial system

• deeper and more liquid markets lower costs and increase competitiveness

• MS with small and large capital markets set to gain

• facilitate shock absorption within EMU (risk-sharing)

Stronger capital markets support investment, growth & jobs

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Agenda

CMU is a key priority for the Commission

Targeted actions across six policy areas

Next steps

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Capital markets link savings to growth

Need funds to grow

Start-ups & small businesses

Mid-caps & large companies

Infrastructure projects

Provide funds

Institutional investors (insurance, pension funds and investment funds)

Retail investors

Banks

Financial integration & stability

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CMU launched on 30 September

CMU Action Plan

• CMU Action Plan & timetable

• Economic analysis

• Summary of CMU Green Paper consultation replies

Delivering the CMU: first set of actions

•Bank lending: securitisation and bank capital requirements

• Insurance: Solvency 2 amendment for infrastructure finance

•Consultations:• Covered bonds

• EuVECA (venture capital) Regulation

• Call for Evidence on impact of recent financial reform

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• A comprehensive approach spanning the diverse, multipleissues raised in the consultation: no single lever will work.

• CMU implies a structural change in EU financial system: initiateirreversible processes to move towards CMU for EU-28by 2019;

• Early action to build momentum and heavy investment indeveloping sound bases for longer-term work;

• Better Regulation: Explore different options before decidingon form: (no action, support industry, supervisoryconvergence, better enforcement, opt-in EU regimes,harmonisation).

Our approach

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Actions in 6 key areas

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1. Finance for start-ups & SMEs

•Crowdfunding report

•Business growth funds

•Private placements

•Loan-originating funds

Innovative corporate financing

•EuVECA/EuSEF review

•EU VC fund-of-funds

•Study on tax incentives for VC and business angelsVenture capital

•Feedback on declined credit applications by banks

•Support & advice for SMEs seeking market finance

•Develop & support EU information systems (match-making)

SME finance

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2. Selling company bonds & shares

•Legislative proposal to amend Prospectus Directive

Simple and cheaper

prospectuses

•SME Growth Markets;

•Voluntary accounting standards for SMEs based on IFRS.

Public trading of small

businesses

•Review drivers of corporate bond liquidity, including voluntary standardisation;

•Common Consolidated Corporate Tax Base (CCCTB) proposal to tackle debt-equity tax bias.

Corporate financing

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3. Infrastructure, sustainability & regulatory review

•Solvency 2 calibrations for infrastructure & ELTIFs

•CRR review ongoing to provide evidence-base for further work;

Infrastructure investment

•Explore link between finance and sustainability, notably by monitoring developments on green bonds

Sustainable investment

•EU legislation to strike the right balance between risk & growth;

•Call for Evidence on cumulative impact of financial legislation.

Regulation supportive of investment

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4. Using markets to support bank loans

•STS proposal on 30 September

•Review CRR and Solvency 2 calibrations Securitisation

•Consultation

•Covered bonds for SME loans

Covered bonds

•Alleviate regulatory burden for credit unions

Local finance networks

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5. More investor opportunities

•Assess retail investment market and whether it is delivering the right outcomes for small investors

•GP on cross-border Retail Financial Services and InsuranceBetter deals

•Build an EU market for personal pensionsMore retirement

savings

•Assess case for Solvency 2 review for private equity and debt (as part of Solvency 2 review)Insurance

• Eliminate barriers to cross-border distribution of investment funds across the EU

Investment funds

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6(1). Facilitating cross-border investing

• Post-trade infrastructure and collateral markets

• Securities ownership in cross-border situations

Market infrastructure

• Tackle unjustified national barriers to free movement of capital

National barriers

• Drawing on 2014 Recommendation, prepare legislative initaive on business insolvency incl. early restructuring and 2nd chance

Insolvency proceedings

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6(2). Facilitating cross-border investing

•Withholding tax refund procedures

•Discriminatory tax on pension & insurance (dividends, interest, real estate income and capital gains)

Cross-border tax barriers

•Convergence of supervisory outcomes (single rulebook);

•Capacity building through the Commission's Structural Reform Support Service (SRSS)

•White Paper on ESA funding and governance;

•Monitoring of macroprudential risks (forthcoming ESRB review).

Stability and convergence

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Next steps

•Discussion of priorities and implementation

•ECOFIN Council: conclusions by year-end

•EP (ECON): regular reporting & specific CMU actions

Co-legislators

•Launch work on delivery of commitments

•Individual projects with key stakeholdersStakeholders

•Regular reporting

•Mid-term review in 2017

Monitoring progress

Criteria for simple, transparent and comparable securitisation

Seminar: Towards a Capital Markets Union

Madrid, 5 November 2015

Tim Pinkowski

IOSCO General Secretariat

disclaimer

• The views expressed in this presentation are my own and not necessarily those of IOSCO or its members.

2

Overview

BCBS-IOSCO Task Force on Securitisation Markets: Background & objective

STC Criteria

Asset Risk

Structural Risk

Fiduciary and Servicer Risk

Next steps

BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS

OBJECTIVE

• A review of securitisation markets

• Identification of factors hindering the development of sustainable securitisation markets

• Developing criteria to identify and assist in the development by the financial industry of simple and transparent securitisation structures

BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS

TFSM developed criteria

To identify and assist in the development by the financial industry of simple, transparent and comparable securitisations

To assist investors with their due diligence on securitisations (not a substitute for due diligence)

modular approach: interested parties may complement these criteria with additional and/or more detailed criteria based on specific needs and applications

STC Criteria

Draft criteria have been classified under three categories

asset risk generic criteria relating to the understanding of the asset pool

structural risk: transparency around the securitisation structure

fiduciary risk: governance of key parties to the securitisation process

STC Criteria

Asset Risk

Nature of the assets

Asset performance history

Payment status

Consistency of underwriting

Asset selection and transfer

Initial and ongoing data

BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS

Structural Risk

Redemption cash flows

Currency and interest rate asset and liability mismatches

Payment priorities and observability

Voting and enforcement rights

Documentation disclosure and legal review

Alignment of interests

BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS

Fiduciary and Servicer Risk

Fiduciary and contractual responsibilities

Transparency to investors

Next steps

The BCBS IOSCO TFSM has started work to

develop criteria for short-term securitisations

engage with market participants to encourage industry initiatives to improve the standardisation of securitisations documentation

Reports

Criteria for simple, transparent and comparable securitisation (2015)

Global Developments in Securitisation Regulation (2012)

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD394.pdf

Peer Review of Implementation of Incentive Alignment Recommendations for Securitisation (2015)

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD504.pdf

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD494.pdf

Thank you

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