contribution capital markets union: a vision for...

ISSUE 2015/05APRIL 2015 CAPITAL MARKETS

UNION: A VISION FORTHE LONG TERM

NICOLAS VÉRON AND GUNTRAM B. WOLFF

Highlights• Capital Markets Union (CMU) is a welcome initiative. It could augment economic

risk sharing, set the right conditions for more dynamic development of risk capitalfor high-growth firms and improve choices and returns for savers. This offers majorpotential for benefits in terms of jobs, growth and financial resilience.

• CMU cannot be a short-term cyclical instrument to replace subdued bank lending,because financial ecosystems change slowly. Shifting financial intermediation towardscapital markets and increasing cross-border integration will require action on multiplefronts, including increasing the transparency, reliability and comparability of informa-tion and addressing financial stability concerns. Some quick wins might be availablebut CMU’s real potential can only be achieved with a long-term structural policy agenda.

• To sustain the current momentum, the EU should first commit to a limited numberof key reforms, including more integrated accounting enforcement and supervi-sion of audit firms. Second, it should set up autonomous taskforces to prepare pro-posals on the more complex issues: corporate credit information, financialinfrastructure, insolvency, financial investment taxation and the retrospectivereview of recent capital markets regulation. The aim should be substantial legisla-tive implementation by the end of the current EU parliamentary term.

This Policy Contribution was presented by the authors to the EU’s finance ministersand central bank governors at the Informal ECOFIN meeting in Riga on 25 April 2015.Nicolas Véron is a Senior Fellow at Bruegel and a Visiting Fellow at the Peterson Institutefor International Economics. Guntram B. Wolff is the Director of Bruegel. Moreinformation and disclosures on the authors are available at www.bruegel.org. Researchassistance by Pia Hüttl and Álvaro Leandro at Bruegel is gratefully acknowledged.

Telephone+32 2 227 4210 [email protected]

www.bruegel.org

BRU EGE LPOLICYCONTRIBUTION

CAPITAL MARKETS UNION:A VISION FOR THE LONG TERM

NICOLAS VÉRON AND GUNTRAM B. WOLFF, APRIL 2015

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BR U EGE LPOLICYCONTRIBUTION

1. Juncker (2014a).

2. Juncker (2014b).

3. European Commission(2015a).

4. See in particular AFME(2015a), Anderson et al

(2015), BlackRock (2015),Dixon (2014), European

Issuers, EVCA and FESE(2015), Goldman Sachs(2015), House of Lords

(2015), Martinez andPhilippon (2014), Odendahl

(2015), Véron (2014) andWright (2014).

5. See eg Véron (2012),Sapir and Wolff (2013).

6. Draghi (2014).

7. This point was developedin the pre-crisis context by

Philippon and Véron(2008).

1 INTRODUCTION

The European Commission has created momen-tum around the idea of a European Capital Mar-kets Union (CMU). The expression was first usedby then Commission president-elect Jean-ClaudeJuncker in the initial exposition of his policyagenda in mid-20141. Since then, CMU has beenprominently included in the title and job descrip-tion of the Commissioner for financial services –or to give him his full title, the Commissioner forFinancial Stability, Financial Services and CapitalMarkets Union2. The Commission published agreen paper on CMU in February 20153. Theannouncement of CMU as a policy priority haselicited a number of substantial contributionsfrom a variety of stakeholders, both before andafter the publication of the green paper4.

This mirrors a broader shift in the Europeanpolicy consensus. At the outset of the financialcrisis in 2007-08, European policymakers oftendescribed the bank-based nature of Europe’sfinancial system as a factor of stability, in contrastwith the more exotic features of finance in the US,such as securitisation conduits and other forms of‘shadow banking’. However, Europe's dependenceon banks and the scarcity of alternative financingchannels have since been identified as significantfeatures of the European crisis and obstacles toits resolution5. The president of the European Cen-tral Bank (ECB) illustrated the new consensus byobserving that “the crisis has shown the draw-backs of over-reliance on a bank-centred lendingmodel. So we also need to develop reliablesources of non-bank lending, such as equity andbond markets, securitisation, lending from insur-ance companies and asset managers, venturecapital and crowdfunding”6. In the debate on CMU,the reference to ‘capital markets’ is often used asshorthand for such sources of non-bank lending,and is preferred to the expression ‘shadow bank-ing’, which has more negative undertones.

CAPITAL MARKETS UNION: A VISION FOR THE LONG TERM

This shift is welcome from an economic-policystandpoint. Capital markets play an important rolein sharing economic risks and smoothing con-sumption and investment. They can provide betteraccess to funding. A well-designed CMU agendashould also make a substantial contribution tofinancial stability. The prior preference for bank-based finance ignored the advantages of a diversefinancial system and the risks associated with thenear-absence of alternative financing channels. Italso led to insufficient development of forms offinancing that are specifically suited for high-growth firms that are major potential creatorsEuropean jobs7. During the crisis, over-reliance onbanks was an obstacle to swift repair of the Euro-pean banking system, and it exacerbated suddenstops and cross-border divergences in bank fund-ing costs.

The debate will benefit from a clear articulationof the CMU’s objective. We suggest that the CMUagenda should aim to enable access by EU eco-nomic agents to the best-suited possible financ-ing options, while safeguarding financial stability.This definition highlights major differences, in par-ticular, with the banking union which is currently ina phase of implementation. The definition indi-cates that the CMU focus is not the financial sectorbut the broader European economy. Stability con-cerns are not the primary driver, but only a checkon the development of CMU. Institutional issuesare not at the core of the CMU project, even thoughinstitutional changes might be necessary to reachits aims. Its geographical scope is not centred onthe euro area, but extends to the entire EU (seebelow). Last but not least, it is not triggered bycrisis-management challenges, but is part of abroader long-term agenda of structural reform atthe EU level. Banks play a vital part in capital mar-kets, even in systems in which non-bank financeis comparatively more developed than in the EU.Thus, well-designed policies for banks and capitalmarkets can be mutually reinforcing.

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BR U EGE LPOLICYCONTRIBUTIONCAPITAL MARKETS UNION: A VISION FOR THE LONG TERM

The CMU agenda connects with a long history ofEU capital-market building. Starting from theTreaty of Rome’s expression of the freedom ofmovement of capital in 1957, major milestones onthis historical path include the elimination ofrestrictions on capital movements in 1988; theFinancial Services Action Plan of 19998, initiated inthe wake of Europe’s Economic and MonetaryUnion (EMU) and mostly implemented in the early2000s; and the creation of European SupervisoryAuthorities (ESAs) in 2011, and new impetusgiven towards a ‘single rulebook’, following theLarosière Report of February 20099. This histori-cal continuity also suggests that, to deserve itslabelling as a genuine ‘union’, the CMU agendashould go beyond the mere extension of pre-exist-ing initiatives, even if these are important andhelpful. It must envisage high-impact new stepsthat would trigger measurable progress towardsits stated objective.

The CMU agenda is for the entire EU. The notionof a single market for capital10 aligns with the EU’sinternal market policy framework. Various analy-ses have identified specific benefits of CMU for theeuro area, particularly in terms of risk-sharing11.While these benefits are an important motivationfor CMU, they do not analytically imply that theproject should or even could be executed at theeuro-area level. On the contrary, the dominance ofthe City of London as Europe’s capital markets hub(see next section) makes it impractical and unde-sirable to envisage a policy framework that wouldbe limited to a subset of EU member states. TheUK government has welcomed the announcementof CMU and signalled its intent to engage activelyin its shaping12, in sharp contrast with bankingunion, which the UK government also welcomedbut on the condition of not taking part. Envisaginga CMU that would not include the UK or other non-euro-area member states would be economicallycounter-productive13.

As a contribution to shaping the CMU agenda, wesuggest an analytical framework and a vision forpolicy. We present facts about EU capital markets(section 2), issues that should be taken intoaccount in the development of CMU policy (section3), corresponding policy options over the mediumto long term (section 4) and suggestions for policyimplementation and sequencing (section 5).

8. European Commission(1999).


10. See Coeuré (2014).

11. See eg Anderson et al(2015), Coeuré (2014) and

Martinez and Philippon(2014).

12. See, for example, quotefrom UK Chancellor GeorgeOsborne in Marion Dakers,

‘Europe launches blueprintfor capital markets union’,

The Telegraph, 19 February2015.

13. The only qualificationwould be about some lim-

ited aspects of the CMUagenda on which the legal

basis would require una-nimity, and this would not

be achievable across all EUmember states. Such

aspects, eg proposals insection 4 about taxation

issues, might best beaddressed through

enhanced cooperation.

2 ASSESSING THE EU’S CAPITAL MARKETS

When analysing financial intermediation and cap-ital markets, three perspectives are useful: theperspective of the demand for finance from cor-porations, households and governments; the per-spective of financial intermediaries; and theperspective of asset owners such as savers orinvestors. All three are important in understand-ing differences in capital-market structures in dif-ferent jurisdictions. They are equally important inidentifying the challenges the EU faces when pro-moting the development of capital markets.

The magnitude and composition of financialintermediation are substantially different inmajor economies. Figure 1 shows the EU’s largebanking sector, while in the US, debt securities andstock markets play a major role in financial inter-mediation. China’s financial system is still sub-stantially smaller than the EU/US financialsystems while the structures of the Japanesefinancial system place it between the US and EU.

The funding of the corporate sector is substan-tially different in different jurisdictions. Only apart of the financial system provides intermedia-tion to the non-financial corporate sector, and the

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Figure 1: Size of the financial sector and capitalmarkets (% of GDP)

Sources: Bruegel based on IMF World Economic Outlook, WorldBank, Association for Financial Markets in Europe (AFME),Securities Industry and Financial Markets Association(SIFMA), Asian Bonds Online, China Banking Regulatorycommission, Board of Governors of the Federal ReserveSystem, European Central Bank, Bank of Japan, ChinaStatistical Yearbook, and World Federation of Exchanges. Note:All data refer to end 2014 except EU: equity market (end2012), Corporate and government debt securities (end 2013)and Japan: Banking sector assets (end 2013).

CAPITAL MARKETS UNION: A VISION FOR THE LONG TERMBR U EGE LPOLICYCONTRIBUTION

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The structure of financial intermediationchanges slowly. The way non-financial corpora-tions fund themselves tends to be stable overtime (Figure 3). In the United States, for example,the percentage of equity in total corporate fund-ing has remained almost unchanged in the last 30years. However, bank credit has become lessimportant and was partly replaced by securitisa-tion (Figure 4). In both the UK and the euro area,equity financing has gradually lost importancewhile bank lending became significantly moreimportant until the beginning of the crisis.

There are substantial differences in the fundingmodels in different EU countries, with bank lend-ing, securitisation, corporate bonds and equityplaying very different roles (Figure 5).

The EU financial system remains national; cross-border integration is limited. Retail banking hasremained largely national with few cross-borderloans and limited cross-border ownership of sub-sidiaries, depending on the country (Figure 6).Wholesale banking became integrated before thecrisis but has since lost its cross-border importance.Cross-border corporate bond holdings declined sub-stantially during the crisis, but recently increased.The home-bias in equity remains substantial, with64 percent of EU equity holdings and 61 percent ofeuro-area equity holdings being of domestic origin.

Capital markets can play an important role inspreading economic risk across different regions

way the corporate sector is funded is substantiallydifferent in different jurisdictions (Figure 2). EUcompanies, like their Japanese counterparts, relymore strongly on bank credit, while US companiesrely more on equity financing, corporate bondsand securitisation. In China, corporate credit mar-kets remain comparatively underdeveloped.

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Figure 3: Size of different financial intermediation channels to the non-financial corporate sector asshare of total financial intermediation

Sources: Panel 1: US Bureau of Economic Analysis, Board of Governors of the Federal Reserve System, Securities Industry andFinancial Markets Association (SIFMA), World Federation of Exchanges. Panel 2: Eurostat, World Bank, Association for FinancialMarkets in Europe (AFME), European Central Bank; * Equity refers to 2012. Panel 3: World Bank, Office for National Statistics, Bankfor International Settlements, Association for Financial Markets in Europe (AFME), European Central Bank; * Equity refers to 2012.

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Figure 2: Size of financial intermediation to thenon-financial corporate sector (% of GDP)

Source: Bruegel based on IMF World Economic Outlook, WorldBank, Association for Financial Markets in Europe (AFME),Securities Industry and Financial Markets Association(SIFMA), Asian Bonds Online, OPPLand Corporation, Board ofGovernors of the Federal Reserve System, European CentralBank, Bank of Japan, China Statistical Yearbook and WorldFederation of Exchanges; *securitisation is non-financialcorporate sector in the US (Commercial Mortgage backedsecurities) and the EU (Commercial Mortgage backedsecurities as well as SME securitisation) and totalsecuritisation for China and Japan. Note: Data refers to: US:2014; EU: 2013, except equity market (2012); China: 2014,except non-financial corporate bond market (2012) and bankloans to companies (2012); Japan: 2014.


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14. See Sorensen andYosha (1998), Bijlsma and

Zwart (2013), Allard et al(2013), European

Commission (2015b).

and jurisdictions. A substantial body of literatureprovides evidence that well-integrated and deepcapital markets can spread country and region-specific risk, smoothing the impact of deep reces-

sions on consumption and investment (Figure7)14. Such economic risk sharing requires sub-stantial cross-border equity holdings in particular.

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Agency MBS Agency CMO ABS CDO

Figure 4: US and European securitisation outstanding (US$ billions)

Source: Bruegel using SIFMA. Note: European volumes include transactions from the European Economic Area (EEA) countries andcertain non-EEA countries located on the geographic European continent (Turkey, Kazakhstan, Iceland, Georgia, Russian Federation).Whole business securitisations (WBS), commercial mortgage-backed securities (CMBS), small and medium-sized enterprisesecuritisations (SME), other asset-backed securities (ABS) collateralised debt obligations (CDO), residential mortgage-backedsecurities (RMBS), Agency collateralised mortgage obligations (Agency CMO), Agency mortgage-backed securities (Agency MBS).

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Equity (Dec. 12)

Outstanding amounts of securitised products by country of collateral (Dec. 14)

Figure 5: Breakdown of financing channels by EU country (in % of the respective country’s GDP)

Source: Bruegel based on ECB, World Bank, AFME. Note: ‘Equity’ is defined as market capitalisation of listed companies; datawas transformed using the GDP of the respective period.

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Figure 6: Share of assets held by foreign banks (in %)

Source: European Central Bank. Note: Foreign banks are defined as subsidiaries and branches that are controlled by either anEU or a non-EU parent that is ‘foreign’ from the reporting country's point of view.

15. Criscuolo et al (2014).


06

banks a greater role in financial intermediationin the EU than in the US.

The different savings patterns also have impor-tant implications for maturity transformation.The maturity structure of savings in the US and theEU is substantially different: US savers invest amuch larger share of their savings in assets withlong maturities, including equity, life insuranceand pension funds, while EU savers invest ininstruments that are easily accessible such asdeposits. As a consequence, the financial systemhas to provide different levels of maturity trans-formation in the different jurisdictions if it wants toachieve the same funding structure of corporates.

Rather than small and medium-sized enterprises(SMEs) in general, it is young, high-growth com-panies that play the central role in EU job cre-ation. It is often mentioned in policy debates thatmore than 65 percent of EU employment andmore than 55 percent of EU value added is con-tributed by SMEs . But it is even more importantthat young firms, as opposed to older companies,are the true engines of job creation. According toOECD research, about half of all new jobs are cre-ated by young firms, and these young firms havealways been net job creators throughout the busi-ness cycle (with high-growth firms playing themost important role), even during the financialcrisis15. Hence, if creating jobs is a key goal, thefinancing and growth of such young, high-growthfirms is a central challenge for the EU.

Most SMEs will continue to rely on bank funding,but securitisation and non-bank credit couldplay greater roles to improve funding of largerSMEs. The role of SMEs in capital markets isminimal. They predominantly rely on bank lendingfor their funding (Figure 9 on the next page). To theextent that bank lending is a constraint becauseof limits to banks’ balance sheets, securitisationcould free up additional lending. The securitisationmarket for SMEs is particularly strong in Spain andItaly. However, it serves more to create assetseligible for the collateral operations of the ECBthan to free up banks’ balance sheet capacities.Most of the newly issued securities are retained(Figure 10). Developing a more dynamic marketfor creating and placing SME credit as securitiescould be a helpful avenue to improve funding for

Funding models are not only determined by thebehaviour of corporations but also by the behav-iour of savers. When savers invest significantamounts of their savings in equity, then fundingwith equity becomes easier for corporations. Con-versely, if savers put their money mostly into bankdeposits, banks tend to play a greater financialintermediation role. EU households predomi-nantly save in deposits while US households pre-dominantly save in shares, life insurance andpension funds. Figure 8 shows that EU house-holds save much less in bonds, stocks and insur-ance than US households. Instead, they havemore than 40 percent of their financial wealth inthe form of deposits. Also, the level of financialwealth is very different in the EU and the US. As of2012, the average household in the EU15 (beforethe 2004 enlargement) held €39,160 in net finan-cial wealth, while the average US household held€110,227. The different savings patterns give

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Source: IMF (2013), Figure 2.

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Figure 8: Financial portfolio of households in theEU and US (in % of total financial assets)

Source: OECD (2011).

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16. This point is furtherdeveloped in Philippon and

Véron (2008).

17. European BankingAuthority (2014).

18. Bruegel calculationsbased on the Triennal Cen-tral Bank Survey of foreignexchange and derivatives

market activity in 2013,available at:

http://www.bis.org/publ/rpfx13.htm.

cent of highly-paid financial executives in the EUare based in the UK. The next most significantgroup is in Germany, representing only 6 percentof the total17. Similarly, the UK's share of totalderivatives transactions in the EU rose from 61percent to 77 percent in the 15 years to 2013(London’s share in the global total also rose duringthis period, from 33 to 43 percent). As of 2013, thenext largest share in the EU was France's, at only7 percent of the EU total18.

3 ANALYTICAL TAKEAWAYS

Because the structure of financial systemschanges slowly, CMU should not be seen as a‘quick fix’ substitute for repairing the bank-lend-ing channel where still needed. To revive eco-nomic growth and investment in the short term,policymakers are right to rely on ECB monetarypolicy measures, including the quantitative easingprogramme started in March 2015; on the work bythe European Single Supervisory Mechanism andSingle Resolution Board to repair banks’ balancesheets and achieve a return of trust to Europe’sbanking sector; and on initiatives to boost invest-ment, such as the Juncker investment plan at theEU level and national confidence-building meas-ures. Even though an assessment is not within thescope of this paper, these actions all have growth-and job-boosting potential in the short-term. Bycontrast, hopes that CMU would play a meaning-ful role in EU economic recovery from the crisis arelikely to be disappointed.

CMU should be designed and thought of as struc-tural and long-term transformation of financialintermediation in the EU. It cannot serve as ashort-term stimulus to boost finance. Rushing itthrough subsidies or tax or regulatory privilegeswill be distorting and ultimately counter-produc-tive and should be avoided. What counts is tocreate the right framework conditions so that thenew financial ecosystem can develop at its ownpace, which will be gradual.

The two objectives of enhancing capital marketsdevelopment and of fostering cross-borderfinancial integration are distinct and mightrequire different policies. Europe’s financialsystem can be characterised by two fundamentalfeatures. First, capital market finance is compara-

SMEs. Realistically, however, this would only makea difference for a minority of larger SMEs, given theidiosyncratic nature of SME credit risk and the costof documenting securitisation. Beyondsecuritisation, service innovators that do not havetangible collateral to pledge need access to high-risk forms of credit such as mezzanine andhigh-yield debt, which are typically not offered bytraditional banking16.

Financial services tend to concentrate in hubs.In the EU in particular, wholesale financial activityis already highly concentrated in London, and ifanything, the recent years of crisis appear to haveaccelerated the concentration because bankshave been forced to restructure their less-efficientactivities. A recent survey suggests that 77 per-

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Figure 9: Sources of SME financing in the pastsix months (% of EU28 SMEs)

Source: Bruegel based on European Commission, SAFE 2014.

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Figure 10: European SME securitisationissuance by retention (in € billions)

Source: AFME; Note: since 2007, the total issuance can besplit between ‘retained’ and ‘placed’, where ‘placed’ refers tosecuritisations placed with investors on the primary marketand ‘retained’ refers to securitisations retained by banks tocreate liquidity buffers and to access ECB liquidity.

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BR U EGE LPOLICYCONTRIBUTION CAPITAL MARKETS UNION: A VISION FOR THE LONG TERM

19. Veugelers (2011).

tively underdeveloped in most countries giventheir general level of economic development.Second, financial markets still remain predomi-nantly national, as measured by high home biasin investment patterns. The two issues are linkedbut call for different policies. While the responsein the first case should be to improve conditionsfor capital market intermediation in every country,the second issue should be addressed by har-monising and standardising the national financialintermediation rules and practices.

CMU should combine the benefits of deepeningand integrating financial markets. Both are ben-eficial and mutually reinforcing. Integration acrossborders, not least in equity markets, brings eco-nomic risk mitigation and reduces the financial-sovereign vicious circle. It also increasescompetition and allows for scale effects, whichshould help to generally reduce funding costs.This integration will also contribute to the devel-opment of markets. Deeper capital markets, inturn, offer a greater variety of funding options andeasier access to finance for different kinds of cor-porations. They also increase the options forhouseholds to save and invest.

Most SMEs will remain reliant on banks for theirexternal funding and will not be directlyimpacted by CMU. However, CMU should havematerial impact to broaden financing options forhigh-growth companies of all sizes and dynamicmedium-sized firms. It is misleading to charac-terise CMU as a project to target primarily SMEs.SMEs will continue to rely predominantly onbanks, even though larger SMEs might gain capitalmarket access through better-developed corpo-rate loan securitisation. Large corporationsalready have decent access to capital markets.Where CMU offers most potential is for high-growthcompanies, which lack access to risk capital19 andfor medium-sized companies, which currentlyhave much more limited access to capital marketsthan large groups.

To boost the role of capital markets in financialintermediation, the perspectives of savers,financial intermediaries and non-financial firms

are all important. The shape of the financialecosystem depends on decisions taken by allthree categories and the framework conditionsthat affect them. Changes in the funding mix fornon-financial corporations have implications forfinancial intermediaries as well as for savers. Forexample, strengthening equity funding impliesthat investors need to accept higher risk andlonger maturities. While the current pattern ofEuropean savings in low-risk, short-maturityinstruments is probably rooted in preferences anddemographic structures, it is also encouraged byspecific tax and regulatory policies. These policiesshould be amended to further the objective ofbetter funding for the European economy, includ-ing through equity instruments. Similarly, corpo-rate governance and ownership patterns that aredominated by family control in several EU memberstates might contribute to companies’ reluctanceto tap external sources of finance, especiallythose outside banks. But a more favourable policyframework could incentivise a significant numberof companies to change their financing patternsin a manner that would be more conducive toinvestment and job creation. Financial intermedi-ation and in particular banks are also central.Banks perform important functions in terms ofmaturity transformation, financial engineering andthe overcoming of information asymmetries, andthey have the capacity to deal with regulatory andsupervisory differences between countries.Increasing harmonisation across EU countriescould allow other organisations or even savers toengage directly in cross-border activity moreeasily. However, this also means that non-bankstake certain risks, including in terms of maturitytransformation.

Deeper and more integrated capital marketsshould spread economic risk, but potential finan-cial stability risks need to be managed. The eco-nomic literature and the empirical evidence areclear that financial integration is a good way tospread economic risk. But the emergence of newfinancial players also raises financial stability con-cerns, especially when they engage in maturitytransformation and/or financial engineering. Thereare risks at the level of instruments, institutions

‘Deeper capital markets offer a greater variety of funding options and easier access to finance

for corporations. They also increase the options for households to save and invest.’

09


20. Based on membershipof the Federation of Euro-

pean Securities Exchanges(FESE) and the World Feder-

ation of Exchanges (WFE).These groups are, respec-

tively, BATS, Nasdaq and theNew York Stock Exchange

(part of ICE) in the US; andthe stock exchange groups

headquartered respectivelyin Amsterdam (Euronext),

Athens, Bucharest, Bulgaria,Cyprus, Frankfurt

(Deutsche Börse), Ireland,Luxembourg, Madrid, Malta,Stockholm (part of Nasdaq

OMX), Vienna (CEE StockExchange), and Warsaw in

the EU. This list does notinclude the separate stock

exchanges in Bratislava andZagreb, which do not appear

on the FESE membershiplist.

21. These included a brain-storming workshop held at

Bruegel on 24 November2014, a presentation by the

authors at a meeting of theEU Financial Services Com-

mittee on 20 January 2015,participation of the authors

and their Bruegel col-leagues in a range of confer-

ences and other eventsorganised by third parties in

a number of different EUmember states, and numer-ous bilateral conversationswith interlocutors in acade-mia, the public policy com-

munity, the private sectorand other segments of

European civil society. Theauthors are also grateful to

all those who have givenfeedback on early drafts of

this paper.

22. Among others, Wright(2014) notes that “there isa striking inconsistency in

data in some parts of the[EU] capital markets”.

would be positive in all member states eventhough the magnitude would vary. Local financialecosystems now work through private equity andinvestment communities, not local financial infra-structure such as stock exchanges. To reap effi-ciency gains, CMU should be allowed to disruptcurrently protected national infrastructure plat-forms and other entrenched financial marketstructures.

CMU goes beyond a narrow definition of financialservices policy. Financing patterns are deter-mined not only by securities, conduct and pru-dential rules that are specific to the financialsector, but also by other policies that shape thebehaviour of companies, savers and financialintermediaries, such as those that govern thesharing of information and data, insolvency frame-works and tax policies. This broad scope isreflected in the policy proposals of the followingsection.

4 POLICY AGENDA

The following recommendations are based on theanalytical framework presented in the previoussection, and on the current stage of developmentof capital markets policy in the EU. They alsofollow extensive discussions with a wide range ofstakeholders21 and a review of available surveysand evidence. It is not implied that all the followingitems must be delivered in full for the CMU to be along-term success, nor indeed that this list isexhaustive – other significant initiatives may beneeded, possibly in the wake of new technologi-cal developments. Nevertheless, these items allappear important if the goals of the CMU asexpressed by the European Commission and ten-tatively defined in this paper’s introduction are tobe met.

System-wide surveillance. Most EU memberstates have a long tradition of monitoring risks intheir national banking systems. In the euro area,the implementation of banking union offers theprospect of much-improved supranational bank-ing risk monitoring. However, the surveillance of amore complex financial system in which the roleof banks could gradually become less dominantimplies new challenges, which call for an ade-quate infrastructure22. This echoes legitimate con-

and the system. While not identical to those frombanking, financial stability risks from capital mar-kets and non-bank finance need to be adequatelymonitored and, if necessary, mitigated throughappropriate regulation. Thus, financial stabilityconsiderations should be an integral part of CMU.This raises questions about regulation, supervi-sion and resolution and the allocation of thesetasks to relevant institutions.

To achieve a different pattern of householdinvestment, protection of savers is fundamental.Households and savers will only invest in finan-cial products if they are transparent and complywith clear and reliable rules. Deposits in the EUenjoy the extraordinary privilege of a high depositinsurance guarantee. By contrast, other forms offinancial investment have much more limited pro-tection if any, and are often opaque and difficultto understand. Adequate safeguards for saversand investors should therefore be an importantpart of CMU and might require a strengthening ofboth legislation and supervision. Consumer pro-tection also needs to be adequately calibrated sothat it does not stifle risk taking and innovation.

All member states will gain from better access tofinance and better returns for savers, eventhough some will host more financial-sectoractivity than others. In an integrated market,financial firms tend to concentrate in a limitednumber of locations, especially in terms of whole-sale market activity. The US financial system, forexample, is dominated by the role of New York anda few other spots such as Boston, Chicago, and theSan Francisco Bay Area. Yet, Texas or Ohio can stillprosper without a capital market of their own, oreven locally-headquartered large banks. There areonly three stock exchanges in the US, as opposedto 13 in the EU20. Similarly, CMU does not meanthat all member states have to gain in terms of thedevelopment of their own financial services sec-tors. On the contrary, comparative advantageshould be allowed to play its role. From this per-spective, CMU would have a distributional impacton EU member states, given the differentstrengths of their comparative advantage in finan-cial services. This distributional impact of CMU,however, should not shift attention from its moresignificant impact on non-financial corporate fund-ing and improved saving opportunities, which

10


cerns about ‘shadow banking’ and the possibilityof financial risks migrating to parts of the financialsystem where they might escape public monitor-ing. New initiatives are needed both on data col-lection, which currently tends to be fragmentedacross different systems, and on institutionalarchitecture, a particular challenge given thestrong interdependencies between the euro area(which accounts for a majority of the EU’s econ-omy), the UK (which hosts the main hub of EU cap-ital markets) and other non-euro member states.One solution might be to beef up the capacity ofthe European Systemic Risk Board (ESRB) to col-lect and analyse granular data and thus to bringEurope closer to the vision of a holistic real-time‘risk map’23, in conjunction with efforts led by theBank for International Settlements (BIS) andFinancial Stability Board (FSB) at the global level.

Financial product regulation. In the wake of ear-lier efforts to move towards a single rulebook forcapital markets regulation, the EU should continueto work towards a clearly articulated, simple andeffective regulatory framework for those financialmarket activities that cannot simply be left to thediscipline of the markets. This should include thecompletion of projects that have already beenannounced or are at various stages of develop-ment by the European Commission and other EUinstitutions, including on European Long-TermInvestment Funds (ELTIFs)24, securitisation25, therevision of the Prospectus Directive26 and privateplacements27. It should also include additional ini-tiatives such as a revision of the EU framework forUndertakings for Collective Investment in Trans-ferable Securities (UCITS), the reference fundstatus for retail investment in the EU, in order toenable direct investment by UCITS in loans origi-nated by banks, because the current curbs onsuch investment appear excessive from thestandpoint of both financial stability and investorprotection. The EU should also further replacedirectives with regulations to close loopholes,reduce national ‘gold-plating’ (the addition of idio-syncratic national provisions in the legislativetransposition of EU directives) and ensure pan-EUregulatory consistency. Such regulatory actionsform the bulk of the concrete policy proposalsdescribed in the European Commission’s greenpaper on CMU. It should however be kept in mindthat while necessary, these measures would be

far from sufficient to enable significant develop-ment and integration of EU capital markets.

Regulation of financial entities. In addition to theregulation of financial products and activities,many financial firms are subject to specific regu-latory, supervisory and in some cases resolutionframeworks that impact on their role in the devel-opment of EU financial markets. Such regulationis generally motivated by concerns about finan-cial stability, given the specific nature of financialsystemic risk, and/or about financial conduct, notleast because of the multiplicity of informationasymmetries that exist in finance. In this respect,legislation currently under discussion on bankingstructural reform is of particular importance28. Thedetailed analysis of this proposal is beyond thescope of this paper. However, it would seem appro-priate to take into account the CMU’s objectives ofcapital markets development in the legislative dis-cussion and finalisation of this text. Other signifi-cant bank-related regulatory projects withsignificant implications for capital markets includefurther EU implementation of the global Basel IIIAccord, and the future EU transposition of theforthcoming global standards on banks’ TotalLoss-Absorbing Capacity (TLAC). EU legislatorscould contemplate delaying completion of bank-ing structural reform legislation so that closely-related TLAC concerns can be incorporated.

Aside from banks, insurers are crucial participantsin European capital markets as investors. Theongoing implementation of the new Solvency 2regime should be completed in 2016 as currentlyplanned, to minimise regulatory uncertainty. How-ever, this package deters investment by insurersin riskier market segments such as equities, undera framework that is largely inspired by the pru-dential regulation of banks and does not ade-quately take into account the longer maturities ofinsurance liabilities. EU legislators should con-sider rapid review of Solvency 2 in order to achievea better balance between the need to maintain thelong-term solvency of insurers and the concernnot to unnecessarily hamper their potential aslong-term risk-taking investors in the Europeaneconomy. Also, the EU should consider adjust-ments to regulations adopted in the heat of thecrisis – for example, those on alternative invest-ment funds and on credit rating agencies – in

23. See eg Issing andKrahnen (2009).

24. The European Commis-sion published a legislativeproposal on ELTIFs in June

2013, which is currentlygoing through the EU leg-

islative process.

25. A consultation is cur-rently underway on “simple,

transparent and standard-ised securitisation” (Euro-

pean Commission, 2015c).

26. On this too, a consulta-tion was started at the time

of publication of the CMUgreen paper (European

Commission, 2015d).

27. See a proposal outlinefor a harmonised single EU

private placement regime inHoumann & Gleeson

(2015).


11


29. AFME (2015a), Figure 1.

30. Maijoor (2015).

31. Judgement of the Courtin case C-270/12, UK vs Par-

liament and Council, 22January 2014, analysed egin Pelkmans and Simoncini

(2014).

32. Both proposals, referredto as a ‘European System of

Listing Authorities’ and a‘European System of EU

Fund Approval’ respectively,are in Houmann and

Gleeson (2015).

order to take into account the impact of their earlyimplementation on EU capital markets activity.

One category of intermediaries that European pol-icymakers have often tried to actively promote isventure capital (VC) funds. The development ofVCs is seen as desirable because it is associatedwith high-growth technical innovators. However,the record of policies aimed at stimulating VCdevelopment through provision of public money,either in the form of public VCs or co-investmentof public funds with private-sector VCs, is not com-pelling. The main reason is that the control mech-anisms that are inherent in any use of publicfunding easily enter into conflict with the high-risk, high-return logic of VC investment, includingthe way VC investments are chosen, and evenmore so the way they might be discontinued whenthe company receiving investment is not suffi-ciently successful. In addition, the injection of sig-nificant amounts of public money intocomparatively small VC markets in individualmember states has often led to market and pricedistortions which have ended up penalising ratherthan helping the most innovation-oriented VCs.Thus, the EU should refrain from throwing publicmoney at the VC market, including though theEuropean Investment Fund (EIF). The best way toencourage a vibrant European VC industry is towork on their investment environment rather thaninterfere directly with their activity. Our proposals,below, should contribute to such an approach,because they focus on the framework conditionsin which capital markets can develop.

EU-level regulatory implementation and enforce-ment. Overwhelming evidence from market par-ticipants suggests that the current regime ofnational implementation and enforcement of eventhe most-harmonised EU regulations results indiverging practices and market fragmentation.Companies and investors cannot simply trans-pose their experience of regulations in onemember state to another, and need country-spe-cific legal advice in each member state. In a recentsurvey, investors cited the complexity of such dif-

ferences and the discrepancies in rules (resultingfrom national rules and from gold-plating of EUlaws) as the two most important barriers to invest-ment in the EU29. The creation of the EuropeanSecurities and Markets Authority (ESMA) in 2011provides an existing infrastructure for the imple-mentation and enforcement of EU legislation in aconsistent manner, but ESMA needs to be furtherempowered to act as an effective regulator ratherthan a weak coordination mechanism. The chair-man of ESMA recently noted that “Given thebreadth and complexity of the single rulebook,regulators need to make many choices regardingtheir supervision, including the interpretation ofthe rules and the intensity of supervision. Diver-sity in these choices will have the result that thesingle rulebook will not in fact be seen as such byinvestors and market participants”30. An EU Courtof Justice ruling in 2014 provided additional legalsecurity on the granting of authority to ESMA onmatters of capital markets regulation31 and ESMAis already the sole supervisor for certain cate-gories of capital market participants, includingcredit rating agencies and trade repositories.

Specifically, the authority to approve new secu-rities issuance and to authorise funds under leg-islation such as UCITS and AIFM may betransferred to ESMA, with a transfer back tonational authorities of much of the actual regula-tory work but as part of a binding EU network inwhich ESMA would have effective policy control32.Other areas, such as EU competition policy and (inthe euro area) the prudential supervision of bankswithin the Single Supervisory Mechanism, provideexamples of such patterns of delegation thatensure both regulatory consistency and a largedegree of operational decentralisation.

Similarly, the enforcement of EU capital marketsregulation should be at least partly pooled at thelevel of ESMA with wide operational delegationback to the national authorities, in order to ensurethat sanctions for non-observance are not simplyevaded by market participants by moving theiractivity from stricter to more lenient EU jurisdic-

‘Overwhelming evidence from market participants suggests that the current regime of national

implementation and enforcement of even the most-harmonised EU regulations results in

diverging practices and market fragmentation.’

12


tions (a practice often described as ‘forum-shop-ping’), for example in relation to rules on securi-ties issuance and investor protection. Similarly,obligations related to system-wide risk monitor-ing, including the requirement to report derivativestransactions to central repositories, are currentlyenforced very differently in different memberstates, and a transfer of enforcement responsibil-ity to ESMA would result both in lower costs and inmuch improved compliance. The possibility ofcoexistence of national and European enforce-ment regimes should be carefully assessed, butmust not be considered an intractable problem perse. The long-standing situation in the US in whichfederal and state-level enforcement frameworksoperate simultaneously, especially in states withsignificant financial activity such as New York,shows that such coexistence can be managed. Inparallel, the Commission should be more assertivein its task of single market enforcement throughinfringement procedures when needed, in casesof national legislation that is not compliant withthe EU framework.

Of course, such regulatory centralisation wouldrequire decision at the appropriate political level,as was the case when the decision to create ESMAand the other ESAs was made in June 2009. Itwould also probably entail reform of ESMA itself.Section 5 further discusses some of the relatedchallenges.

Accounting and auditing. Financial informationhas been justifiably described as the lifeblood ofcapital markets33, and the availability of high-qual-ity and comparable financial information onissuers across the EU is a crucial condition for thesuccess of CMU. The EU adoption of InternationalFinancial Reporting Standards (IFRS), decided in2002 and implemented in 2005-06, was a hugestep in this direction, but more needs to be done.There remain wide differences between memberstates in IFRS implementation and enforcementand in other aspects of financial disclosure. Twomain reforms should be considered in this area.

First, responsibility for IFRS enforcement shouldbe granted to a newly created office of the Euro-pean Chief Accountant (in reference to the equiv-alent authority in the US, which is hosted by theSecurities and Exchange Commission). This office,

which could be envisaged either as part of ESMA oras a new organisation, would be given functionalauthority over the existing national competentbodies34 for purposes of IFRS implementation.Second, the loopholes in EU auditing legislation(including after its latest revision in 2014) shouldbe closed to constitute a genuine single rulebook,and the supervision of audit firms should bepooled at European level in a specialised agencythat could be subject to oversight by ESMA (in arelationship similar to that between the US PublicCompany Accounting Oversight Board and theSecurities and Exchange Commission).

In addition, the European Commission should fur-ther explore the costs and benefits of reformingaccounting obligations that are not currentlywithin the scope of IFRS, namely the financialstatements of individual entities and of unlistedcompanies. While there might be a case for har-monisation35, this should be robustly assessed onthe basis of the subsidiarity principle. It shouldalso be considered in liaison with proposals toreform corporate taxation, because tax account-ing is one of the main drivers of non-IFRS financialreporting in many if not all EU member states: amove towards harmonisation of the corporateincome tax base would have obvious spillovers interms of harmonisation of single-entity account-ing requirements36.

Corporate credit information. Alongside financialinformation covered by accounting and auditingframeworks, information about corporate risk andcredit is similarly important in order to stimulatemarket-based investment. Even though situationsdiffer in member states, capital market partici-pants in the EU other than banks and centralbanks currently have only limited access to creditinformation about SMEs and even many largecompanies (aside from the limited number thatare rated by credit rating agencies). The EuropeanCommission has started work on improving theavailability and quality of such information, asannounced in the CMU green paper. But this raisesissues of confidentiality and market structure, andshould also be connected with the ambitious ECBproject of building an analytical credit dataset(known as AnaCredit) which would also cover alarge part of the SME credit landscape37.

33. See eg Levitt (1999).

34. Depending on nationalcircumstances, these are

currently either accountingenforcement units within

securities regulators (as inFrance, Italy, the

Netherlands and Spain), orhosted by other specialised

public authorities (eg theFinancial Reporting Councilin the UK), or private-sector

bodies empowered by law(eg the Financial Reporting

Enforcement Panel inGermany).

35. For example, Maijoor(2015) argues that “we

should consider moving toa common accounting

language for SMEs thatwould like to grow and get abroader investor base. Thatlanguage should be based

on IFRS but not asextensive as the standard

set of IFRS”.

36. It should be notedhowever that the current EU

project for a CommonConsolidated Corporate Tax

Base (CCCTB) would be onlyan option for companies,

and its adoption would thusnot have obvious impact in

terms of accountingframeworks.

37. See eg Damia and Israël(2014).

13


38. See in particularhttps://www.ecb.europa.eu/

paym/t2s/about/about/html/index.en.html and

https://www.ecb.europa.eu/paym/t2s/about/html/giova

nnini.en.html for adescription by the ECB of

the complexity of clearingand settlement, the

Giovannini barriers, and theexpected impact of T2S.

39. See eg Djankov,McLiesh and Shleifer

(2007), Davydenko andFranks (2008) and Plantin,Thesmar and Tirole (2013).

40. See a recent set ofproposals in AFME (2015b).

Financial infrastructure. As noted in the previoussection, the European landscape for trading andpost-trading infrastructure is marked by extraor-dinary complexity and fragmentation. This is duein large part to the complex legacies of pastnational systems, and also to the lingering sym-bolic potency of stock exchanges as emblems ofnational economic strength and sovereignty. Inthe early 2000s, the European Commission pro-moted a strategic review that resulted in two land-mark reports by a group chaired by AlbertoGiovannini and identified 15 ‘Giovannini barriers’to efficient cross-border clearing and settlementin the EU. Even after initiatives including the adop-tion in 2014 of a new EU Regulation on CentralSecurities Depositories and the creation by theECB of the T2S (Target2Securities) platform forsecurities settlements, many of these barriers stillremain38. As identified in the Giovannini reports,the EU should aim to reduce or eliminate the cur-rent difference between cross-border securitiestransactions and transactions within a single EUcountry. The specific but systemically importantchallenge posed by the prudential supervision ofderivatives clearing houses (known in the EU asCCPs, or central counter-parties) is discussed inthe next section.

Insolvency and financial restructuring frame-works. A growing literature has identified insol-vency law and debt-restructuring practices asmajor determinants of corporate credit39. In the EU,the understanding of this issue has been recentlyenhanced by observation of significant insol-vency reforms in countries under assistance pro-grammes, such as Ireland. A better insolvencyframework allows for a better re-allocation of cap-ital and more growth. In many EU member states,inefficient and antiquated frameworks for insol-vency and debt restructuring deter corporateinvestment and high-risk segments of credit (suchas mezzanine and high-yield debt), becauseinvestors and creditors are insufficiently pro-tected in case of insolvency, and the conduct ofthe insolvency process fails to maximise theprospects for asset recovery. Additional ineffi-

‘A better insolvency framework allows for a better re-allocation of capital and more growth. In

many EU member states, inefficient and antiquated frameworks for insolvency and debt

restructuring deter corporate investment and high-risk segments of credit.’

ciency arises from the lack of consistency of insol-vency provisions across borders, but the first-order issue appears to be the inadequacies ofnational insolvency frameworks in terms of thelaws themselves and the way they are imple-mented through courts and the work of spe-cialised service providers and professions. In thisarea, full harmonisation is unrealistic even overthe long-term, given deeply embedded differ-ences in national legal frameworks. However, theEU could stimulate a coordinated reform processwith common principles and harmonisation of alimited set of relevant aspects40, with appropriatebenchmarking and monitoring at the EU level. Inparallel, the creation of a specific EU insolvencyregime for banks, administered by an EU court,appears indispensable in the medium term tocomplete the legal framework of banking unionand especially the vision of a Single ResolutionMechanism.

Taxation of savings and investment. Since taxa-tion always acts as a key driver of investor behav-iour, differences in frameworks for the taxation ofsavings are a contributor to market fragmentationand to the difficulty of creating powerful, simple,pan-European market segments for investment.In many member states, tax frameworks also con-tribute to the orientation of savings towards low-risk, short-maturity instruments. Because EU-wideunanimity is likely to be unattainable, joint proj-ects for the taxation of savings could be envisagedby subsets of member states using the enhancedcooperation procedure. This procedure hasalready formed the basis for the initiative to createa European Financial Transactions Tax (FTT), butunfortunately this project still appears ill-designed. Protracted discussions over the FTT and,if eventually adopted, its implementation mightact as a brake on investment, with detrimentaleconomic consequences. EU member statesshould instead focus their energies on har-monised taxation of savings, reforming the tax dis-advantage given to equity relative to debt andother initiatives that could stimulate investmentand market development.

14


Possible further items. As mentioned above, thislist is not intended to be exhaustive. In particular,reforms of pensions and housing policies couldhave very significant impact on capital markets,for example with the creation of pan-Europeanpension fund systems or covered-bond markets.However, these developments would have socialand political implications far beyond concernsabout capital markets development.Consequently, we consider them to be beyond theremit of the CMU agenda. However, CMU-relatedaspects may usefully be considered in relevantfuture discussions.

5 IMPLEMENTATION AND SEQUENCING

Maintaining the momentum. A welcome momen-tum on CMU as a high-level priority for the entireEU has been created. It is important to maintainthis momentum through adequate calibration andsequencing of future actions. The delivery of‘quick wins’ on ongoing projects of financial prod-uct regulation (ELTIFs, securitisation, the prospec-tus directive and private placement) is importantin this regard. However, these will be no substitutefor more ambitious initiatives with transformativelong-term impact that would justify the ‘union’label. CMU, if ambitiously executed, can eventu-ally deliver tangible benefits to EU citizens interms of more jobs, growth, and a more stablefinancial system. The challenge will be to keep themomentum going despite the structural nature ofthe effort and the technical nature of the project,which makes it difficult to explain to broader audi-ences. Fortunately, the new EU consensus, whichrecognises the need for stronger capital marketsas a way to make the financial system both moreefficient and more resilient, is supportive. How-ever, the political and technical obstacles shouldnot be underestimated. Given the complexity ofsome of the issues listed in the previous section,it is not realistic to expect a detailed blueprint onall of them by the second half of 2015, when theCommission is expected to publish a CMU actionplan.

Staged process. As a consequence, the Commis-sion’s action plan could combine firm policyannouncements that demonstrate commitmentwith the launch of processes for further study onthe most difficult and complex items.

The area of accounting and auditing may bejudged particularly promising for a firm policyannouncement later in 2015, especially the twomain proposals outlined in the previous sectionon IFRS enforcement and audit regulation andoversight. The need for high-quality comparableinformation across the EU can hardly be disputedas a precondition for CMU. Financial practitionersrecognise that the current policy framework doesnot achieve this aim. The EU can capitalise on thesuccessful adoption of IFRS a decade ago to claimlegitimacy in this area. Furthermore, reform ismade more urgent by the need for cross-borderaccounting and auditing consistency in the euroarea to support the operation of banking union.Early commitments would also be desirable onother proposals made in the previous section,such as on system-wide monitoring, listingauthority, fund approval and enforcement.

To tackle the most complex areas, the EU couldcreate parallel processes of analysis and devel-opment of policy proposals in the following fiveareas: corporate credit information; financial infra-structure; insolvency and debt restructuring;financial investment taxation; and the retrospec-tive review of the aggregate impact of capital mar-kets regulation passed in the last decade, echoingthe Commission's intent to undertake this type ofretrospective analysis41. Given the complex andtechnical nature of these topics, and also the factthat they span the remits of several commission-ers and directorates-general within the Commis-sion, it would be advisable to entrust autonomoustaskforces with the analysis and the develop-ment of corresponding policy proposals. Theirspecific design and governance might vary for dif-ferent issues and should take into considerationpast processes that were judged successful42. Theaction plan should also set target dates for thesetaskforces to deliver detailed proposals, say inlate 2016 or early 2017, so that subsequent leg-islative implementation could be well underwayby the time the current EU legislative term ends inmid-2019.

Institutional issues. Many of the policy proposalsin the previous section imply institutionalchanges. They envisage an expansion of theauthority granted to both ESMA and the ESRB, andthe creation of new EU-level bodies, which may be

41. Hill (2015) declared hisintention “to take a close

look at the cumulativeeffect of the laws we have

passed to make sure wehave got the balance rightbetween reducing risk and

fostering growth”.

42. Examples of successfultask forces include, at the

EU level, the GiovanniniGroup and the Larosière

report, both of which weresupported directly by the

European Commission; andin individual member

states, the IndependentCommission on Banking in

the UK, which was sup-ported by an autonomous

temporary secretariat com-posed of officials seconded

from several governmentdepartments and agencies.

15


needed to ensure adequate independence and/orspecialised expertise (for example for the over-sight of audit firms).

There have been several expressions of concernin early debates about CMU, particularly in the UK,about the risk that proposals for institutionalchange might work against achieving the aims ofCMU. For example, the UK House of Lords arguedthat “any attempt to establish a system of pan-EUsupervision would not only be contentious, butcould prove an unhelpful distraction from the nec-essary reforms that Capital Markets Union is seek-ing to bring about”43. However, this argumentmisleadingly paints the institutional question asblack-and-white, and ignores the fact that ESMA isalready mandated to supervise credit rating agen-cies and trade repositories on a pan-EU basis.

In reality, the institutional question is of a prac-tical, not ideological nature. Some CMU aims canbe attained without changes to the respectiveinstitutions’ mandates, and some cannot. This isbest determined case by case. Both the presentand the future situations are and will be hybridsbetween two extremes, in which supervision isrespectively all-national (an unnecessary stepbackwards from the status quo) or all-European(an unrealistic and unnecessary prospect thatwould sit oddly with the subsidiarity principle).

A more helpful distinction is between prudentialsupervision, which is typically coupled to a reso-lution framework with possible fiscal implications,and other aspects of financial supervision such asauthorisations of funds and of securitiesissuances, and enforcement of capital marketsrules. In the current phase of EU integration, theformer could be pooled within the banking-unionarea, but pooling across the entire EU appearsmore problematic, given potential fiscal implica-tions for which taxpayers are the final backstop.By contrast, EU-level pooling of authority over theregulation of financial conduct would not“impinge in any way on the fiscal responsibili-ties of member states” (to quote from the legisla-

tion that created ESMA and the other ESAs). Thelogic that led EU member states, including the UK,to support the creation of ESMA has not changed,and an adjustment of ESMA authority should notbe considered intrinsically contentious if it canhelp to address certain issues better than the cur-rent division of labour among national authorities.

The current setup of ESMA and other EU-levelagencies should not be considered untouchable.On the contrary, it needs change. The fundingmechanism envisaged for the ESAs has not func-tioned effectively44, and their governance hasproved less than optimal in terms of effectiveness,independence and quality of the decision-makingprocess45. The reform of the ESAs’ governanceand funding, which is specifically expressed aspart of the mandate given to the commissioner forfinancial services by the Commission’s Presi-dent46, should thus be closely coordinated withthe development of the CMU project. In the case ofESMA, the increased concentration of capital mar-kets activity (though not of the economic benefitsof strong capital markets) in a limited subset ofmember states raises particular questions abouta framework in which each member state is cur-rently represented on the ESMA supervisory boardby its national securities regulator.

As mentioned in the previous section, the pru-dential oversight of CCPs is a special case. Therecent reforms of derivatives markets haveincreased the systemic importance of CCPs, andtheir implementation is still far from complete. Thereform agenda itself, as defined at the global levelduring the September 2009 G20 PittsburghSummit, has not taken into account cross-borderinterdependencies in a fully adequate manner.Thus, the challenges posed by CCPs with signifi-cant international activity, such as those affiliatedwith the London Stock Exchange and ICE groupsin the UK, raise both global and intra-EU coordina-tion questions. It would be advisable for the EU tofind answers to such questions to be delivered atthe global level, difficult as that may be, before itenvisages their permanent settlement in a con-

‘Some CMU aims can be attained without changes to the institutions’ mandates, and some

cannot. This is best determined case by case. Both the present and the future situations are and

will be hybrids between two extremes: all-national supervision, and all-European supervision.’

43. House of Lords (2015),paragraph 75.

44. See eg the joint lettersent by the Chairs of thethree ESAs to the ECOFIN

president on 5 November2014, available at

https://eiopa.europa.eu/Publications/Other%20Docume

nts/ESAs_2014-41___Joint_ESAs_letter_to_EU_C

ouncil_Presidency_-_ESAs_Budget_2015_.pdf.

45. The most strikingexample has arguably beenthe ill-starred stress testingof EU banks coordinated by

the European BankingAuthority (EBA) in 2011,

which was marred bygovernance shortcomings

in spite of the best efforts ofa competent EBA leadership

and staff.

46. Juncker (2015b).

16


sistent manner inside the EU. In this respect, thebest way to avoid politically challenging debatesabout supranational supervision, be it at EU orglobal level, would be to devise and adopt strictlyrules-based resolution mechanisms which give nodiscretion to authorities, and distribute lossesautomatically among market participants in theunlikely event of a systemic failure. While suchrules-based mechanisms cannot be entirely prac-tical for banks, they might be better suited to thedistinguishing features of international CCPs.

International consistency. The economic impactof CMU on the EU depends in part on its interna-tional openness. As the financial services commis-sioner recently put it, “the CMU is not about closingdoors to the outside world. On the contrary, we wantto see more investment from outside investors”47.This implies that, as an indispensable complementto its CMU agenda, the EU should champion inter-

national financial regulatory standards and otherglobal initiatives as it has done previously – notleast its landmark adoption of IFRS a decade ago.The EU should look critically at past episodes, forexample, related to the design and implementationof the Alternative Investment Fund Managers Direc-tive (AIFMD) or the European Market InfrastructureRegulation (EMIR), which triggered debates aboutdiscrimination against non-EU service providers.The EU should be exemplary in complying withglobal standards. It should fully support globalbodies with agendas and mandates that arealigned with the objectives of CMU, in particular theFinancial Stability Board (FSB), Committee on Pay-ments and Market Infrastructures (CPMI) and Inter-national Organisation of Securities Commissions(IOSCO). Far from being driven by idealism, suchglobal commitments would respond to the EU'shard-nosed vested interest in favour of an open andrules-based international financial order.

47. Hill (2015).

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Odendahl, Christian (2015) ‘The low-hanging fruit of European capital markets’, Bulletin 101April/May, Centre for European Reform

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