Analytics, Banks, EU – Baltic States, Financial Services, Investments, Legislation

The new Commission college is clearly on the way to create both social and political unions, coped with some other integration prospects for the banking, energy union and digital agenda, to name a few. Not all the EU member states are excited about such deep integration aspirations being afraid of serious reduction of national sovereignty.

 

Present series of publications is aimed at revealing practical steps that the EU institutions (mainly, the Commission) have undertaken for practical implementation of the new Commission’s political guidance for the member states.

 

The series follow those EU policies’ developments that have been, in fact, actively regulated during the last couple of years. The main sources of information for the series are recent Commission’s press releases, EU documents, speeches of the EU officials and various media resources, mainly during 2014-15.

 

Out of ten vital spheres of activities for the next five years elaborated by the Commission, present materials in the series’ volumes are a reflection on recent EU’s actions in certain socio-economic sectors rather than critical analyses, i.e. these are so-called “news & facts’ collection”, not comments; the judgments are that of readers.

 

The series’ publication is envisaged as the quickest way of delivering most recent EU’s efforts in social-economic integration development to the wide public, including researchers and students in European studies.

 

The first volume in the series was devoted to the present structure of the EU’s “planning” integration, or –in other words- to the modern European political economy process within the framework of the federal-type EU-member states’ relationship. 

(Vol. 1: modern EU Policies: Integration in Action; the second volume in the series covered recent EU’s efforts to stimulate growth and investment read here).

Vol. 3 Financial services through EU’s policies and legislation (part I)

Introduction. Commission’s new initiatives (since the end of 2014) have been aimed at creating the genuine EU’s capital markets union with optimal financial services to assist customers and businesses in the EU member states. It is expected that after consultations with the EU member states and other interested parties (so-called stakeholders), an action plan will be ready paving the way to the all-Europe’s financial market by 2019. 

 

The Capital Markets Union (CMU) aims to break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance. The current situation is being quite tough for businesses that remain heavily reliant on banks and relatively less on capital markets.

 

In other parts of the world the picture is almost opposite: for example, the US’ fully functioning venture capital offered as much as € 90 billion more in funds to companies during 2008-13, which was 5 times higher than that in the EU.

 

With the CMU, the Commission also wants to eliminate existing obstacles that prevent those in need for financial support from reaching investors while making as efficient as possible the system for channeling financial resources to businesses.

 

After the public consultations (which ended in February 2015), the Commission drafted at the end of 2015 an Action Plan, which set out a roadmap and timeline for putting in place the building blocks of a Capital Markets Union by 2019.

 

Commissioner Jonathan Hill underlined in October 2015 that a single market for capital “aims to link savings better with growth”. By building stronger, more sustainable capital markets, he added, the member states could increase investment in infrastructure, give businesses seeking capital a bigger choice of funding, increase opportunities for successful businesses to sell into bigger markets, reducing costs to consumers and add to the options for people saving for the long term”.

http://europa.eu/rapid/press-release_SPEECH-15-5870_en.htm?locale=en

 

In the broader context the EU’s share on global trade reached about 15% in goods, compared to 18% ten years ago. At the same time, the EU has 25% of the world's GDP and about 50% of its social spending; at the same time, over 23 million people are without work in EU-28, of which about one in five is under 25.

 

Moreover, the structure of European population is changing: today, for every person over 65, there are around four people in work; over the next 50 years that figure will fall to two.

http://europa.eu/rapid/press-release_SPEECH-15-5870_en.htm?locale=en

 

These challenges are driving the Commission’s work to build a Capital Markets Union; the EU needs deeper capital markets that can complement bank lending and support European growth. The EU could make the whole financial system stronger by diversifying away from Europe's traditional dependency on the banks. Evidence suggests the US bounced back quicker after the crisis thanks to a greater range of funding sources and deeper capital markets.

 

Commissioner Jonathan Hill’s idea is to build the CMU from the bottom up, step by step, rather from the top down because the EU is going to develop deeper capital markets while overcoming barriers to cross-border investment. Besides, the EU needs to build confidence and generate momentum; for that to happen, the EU needs to identify some measures for early progress without “institutional turf warfare”.

 

In the first months of 2015, the Commission has hold a three-month consultation round, known as a Green Paper, the outcome of which shaped an action plan to help unlock non-bank funding so that start-ups can thrive and larger companies can expand further. Thus, the CMU has become a long-term project that would require sustained efforts over many years with some early progress to be achieved in some financial sectors.  

 

Two complementary consultations on 'high-quality' securitisation and the prospectus directives were also conducted in 2015. 

 

Commenting on the occasion of green paper work, European Commission Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness underlined that CMU was the first structural initiative from the Commission under the investment plan announced at the end of 2014. Therefore, CMU will contribute to ensuring that the investment plan is more than “a one-off push” but having a durable positive impact on economic conditions in Europe.

 

The EU “special” Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union pointed out in February 2015, that the EU direction is clear: to build a single market for capital from the bottom up, identifying barriers and knocking them down one by one.

 

In his opinion, the Capital Markets Union (CMU) is about “unlocking liquidity that is abundant, but currently frozen, and putting it to work in support of Europe's businesses, and particularly SMEs”.

 

Free flow of capital was one of the fundamental principles on which the EU was built more than fifty years ago; presently the EU leaders want “to turn that vision into reality”.  

See: EU’s Capital Markets Union will assist business  

 

CMU’s objectives and principles. The Commission envisages some actions necessary to achieve the following CMU’s objectives: 

 

·         improve access to finance for all businesses and infrastructure projects across Europe;

·         help SMEs raise finance as easily as large companies;

·         create a single market for capital by removing barrier to cross-border investments;

·         diversify the funding of the economy and reduce the cost of raising capital.

 

At the same time, the Commission identified the following CMU’s key principles:

 

·         maximizing the benefits of capital markets for the economy, growth and jobs;

·         creating a single market for capital for 28 EU states by removing barriers to cross-border investment within the EU and fostering stronger connections with global capital markets;

·         to be built on firm foundations of financial stability, with a single rulebook for financial services which is effectively and consistently enforced;

·         ensuring an effective level of investor protection; and

·         helping to attract investment from all over the world and increase EU competitiveness. 

 

In general, the CMU means:

·         consolidating financial reforms while adapting them to changed circumstances if needed, and ensuring that EU legislation is properly enforced;

·         presenting new initiatives to close remaining gaps and ensure that financial markets are well regulated and supervised;

·         initiating policies that contribute to investment, growth and jobs in the EU by enhancing the long-term financing of the economy. This requires further progress towards a well-regulated EU capital markets union encompassing all 28 Member States;

·         making financial services work better for consumers and retail investors;

·         working closely with international partners to promote consistency in regulation and the implementation of agreed standards and principles.

See: http://ec.europa.eu/dgs/finance/mission/index_en.htm

 

Already in the Commission's Communication in November 2014 and in the Investment Plan for Europe, some measures were already pinpointed that could be taken in the short-term. These included: the implementation of European Long-term Investment Fund (ELTIF) regulation, 'high-quality' securitisation, standardised credit information on SMEs, private placement and the review of the Prospectus Directive. These have been areas where the need for progress was widely recognised by all EU states with potential to bring early benefits.

 

= Prospectus Directive review. Prospectuses are legal documents used by companies to attract investment. They contain facts to help investors make informed investment decisions. But they are also costly and administratively burdensome for companies to produce, often requiring hundreds of pages of detailed information. And for investors, it can be complex to wade through excessively detailed information.

 

The Commission in its consultation on the Prospectus Directive held a view to making it easier for companies (including SMEs) to raise capital throughout the EU-28 while ensuring effective investor protection.

 

A key focus will be to reduce the administrative hoops through which companies have to jump. The consultation, among other things, considered: ways to simplify the information included in prospectuses; examine when a prospectus is necessary, and how to streamline the approval process.

 

= Securitisation. Securitisation is the process where a financial instrument is created by pooling assets. That means that more investors will be able to purchase shares of those assets, thereby increasing liquidity and freeing up capital for economic growth. An EU-wide initiative on 'high-quality' securitisation would need to ensure high standards of process, legal certainty and comparability across securitisation instruments through a higher degree of standardisation of products. This would notably increase the transparency, consistency and availability of key information for investors, including in the area of SME loans, and promote increased liquidity. This should facilitate issuance of securitised products, and allow institutional investors to perform due diligence on products that match their asset diversification, return and duration needs.

 

= Medium and long term measures. The general purpose is to overcome obstacles to the efficient functioning of capital markets in the medium- to long-term, including how to reduce the costs of setting up and marketing investment funds across the EU; how to further develop venture capital and private equity; whether targeted measures in the areas of company, insolvency and securities laws as well as taxation could materially contribute to CMU; and the treatment of covered bonds.

Reference: EU’s Capital Markets Union will assist business. 20.02.2015. In: EU’s Capital Markets Union will assist business

Note: Commission information support for the EU’s financial sector

For further analysis it is worth to mention Commission’s information support & websites. Among numerous Commissions’ web-sites concerning financial services and CMU are the following links:  Financing Innovation and SMEs; Enterprise Finance Index; CIP and COSME.

 

As to the financial services’ legislation, there are the following web-sites: Capital Requirements Directive, MiFID (Markets in Financial Instruments Directive), Electronic Money Directive, and Payment Services Directive.

See: http://ec.europa.eu/dgs/finance/contact/index_en.htm

 

Besides, important information can be found in the DG on Financial stability, financial services and capital markets union (FISMA). The mission of DG FISMA is to monitor the effectiveness of these reforms, ensure that EU legislation is fully implemented and respond to emerging financial risks. In addition, the DG would take further steps to develop well-regulated, stable and globally competitive financial markets in the interest of businesses and consumers. To improve access to capital for businesses, especially SMEs, and thereby promote growth and job creation, the DG will bring forward initiatives to create an EU capital markets union.

Financial Services and European economy

Most important in the Commission’s efforts towards CMU are measures to foster supervisory convergence in European financial markets, which should contribute to financial stability.

 

The EU member states have to speed up efforts to serve properly the interests of consumers in using financial services. In the Commission’s implementing act the transitional period for capital requirements for EU banking groups’ exposures to Capital Requirements Regulation is extended. Jonathan Hill, Commissioner for financial stability, financial services and capital markets union underlined that bringing financial services back to the people was important step in facilitating the EU economic policies and bringing retail financial services closer to consumers.  

 

It is the retail investor that is at the heart of the Commission’s work in building up a single market in capital. The EU financial system is built on trust, i.e., the whole financial sector with the regulators and supervisors have to be active part of the transition.   For example, strong sanctions and detailed rules often can lead to a culture of compliance, where people do not take personal responsibility for their actions, and do not ask whether what they are doing is right, but whether it is possible within a certain interpretation of the rules. The role of values and of leadership is vitally important: financial sector has to demonstrate and help rebuild that sense of trust. 

As is known, new business has to start out by winning customers, by finding out what they want and serving them, by building and keeping their loyalty, i.e. by putting customers first. Some clearer codes of behavior could be a good example for businesses to rebuild trust. Working to strengthen financial education is another area where the financial services industry can try to help its customers and also play a bigger part in the society in which it operates.

 

National and EU legislators have to be more active in setting the framework in which people are protected and able to choose financial products that are right for them.

 

The Commission has already taken a number of steps: starting with strengthening the overall financial system, by putting the Banking Union in place, by improving macro-prudential oversight and by strengthening regulation of markets. These steps have been intended to increase confidence and reduce the risk of things going wrong in future.

 

The Commission has brought in rules to give greater protection to depositors and to ensure more responsible mortgage lending. The EU is making sure that in future customers will get clear, simple information when they are buying an investment product in a format they can then compare.

 

Presently, the Commission is drafting legislation to reform the rules governing benchmarks to introduce greater transparency and strengthen the investigative and administrative sanctioning powers of regulators. For example, new EU rules to combat market abuse will mean that from 2016 people manipulating benchmarks can be criminalased.

 

In the insurance field, the Commission is updating the Insurance Mediation Directive, which aims to improve competition, make sure that consumers get better advice and clear information about the people selling to them and how they are paid for it; and makes it easier to provide services across borders. “Trilogue” negotiations have been concluded at the end of June 2015.

 

 These rules need to be implemented effectively and coherently; the European Supervisory Authorities (ESAs) have an important role to play, as they work to protect the interests of consumers. For example, over the past few years, ESAs have issued warnings to retail investors on forex; on the dangers of investing in contracts for difference; and on virtual currencies.

 

This is an area where ESAs could work more closely with the national authorities responsible for consumer protection, and could use their expertise to ensure a more comprehensive approach to consumer protection at the EU level.

 

The ESAs Joint Committee is an excellent tool for cooperation and coordination between the different ESAs: the benefits of this partnership is seen when EBA and ESMA took inspiration from EIOPA’s complaint handling procedure.

 

Note: There are the following three European supervisory authorities (ESAs)in the financial sector:  

 

= the European Banking Authority (EBA), which deals with bank supervision, including the supervision of the recapitalisation of banks;

= the European Securities and Markets Authority (ESMA), which deals with the supervision of capital markets;

= and the European Insurance and Occupational Pensions Authority (EIOPA), which deals with insurance supervision.

 

The scope for action laid down in the ESAs’ founding Regulations is broad: along with the national authorities, they are planning to review national strategies for the coming years and the ESAs are taking the consumer protection mandate seriously. The ESAs’ priorities are focusing on the issues that will have the biggest impact on encouraging a single market for retail financial services in order for consumers to get the most out of the benefits they enjoy from the EU.

 

Digitalisation and innovation in financial sector. One of the important issues in financial services is digitalisation and innovation. In fact, these are new issues that have not been faced by previous generations; it is not so different from the great debates about industrialisation in the eighteenth and nineteenth centuries. At the wake of industrial revolution, e.g. in England in the 19^th century, workers broke into the factories to smash the machines that were increasing production by a factor of 40, and sparked the so-called Luddite riots.

 

 Although the release of the latest generation of smartphone caused a different nation-wide disturbance (e.g. long queues around the supermarkets to try to get hold of it first), vested interests sometimes still argue against innovation and competition. Accepting the inevitability of technological change, adapting to it and making the most of the opportunities is vital if the financial industry wants to survive.

 

Digital technology is revolutionising the ways people interact with financial services’ providers. Mobile payments, online insurance claims and mobile stock trading are now commonplace. Crowd funding and automated advices are growing fast. Advanced IT tools are making it easier for insurers and intermediaries to communicate, allowing them to conduct business faster and to provide a better service.

Retail financial services: additional EU regulation is needed. The use of social media and collaboration tools will clearly be accelerating, including an increase in consumers’ use of comparative websites when buying financial products. While digitalisation is changing finance, risk mitigation and security are becoming an essential element of any financial services policy. But they should accompany innovation and new product development (not standing in the way). It is almost impossible tying to regulate away all possible risk, as without risk there can be no growth, and no challenge by insurgents to established business providers.

 

In view of these challenges, the EU regulation in the retail financial services area is built on three core principles: transparency, competition and choice.

 

For example, transparency means ensuring that consumers are not pressured into accepting certain prescribed products or services; customers shall have good, clear information on which to base their decisions. They need to know if the person selling them a product has an incentive to do so and if the advice they are getting is unbiased. The idea is to be able to see the true cost of a service and to be able to compare it.

 

Consumers should have a real choice of better quality products and providers, no matter whether or not they or the supplier are located in the same country. It is true that at that moment people generally stick within their national boundaries to buy financial products like insurance or investments, for reasons ranging from a lack of trust in foreign providers to language barriers (that used to be true of aviation too).  There are still big variations in the cost of mortgages between different EU states: some of this can partly be explained through different re-financing costs or different tax regimes. And there are many other examples of price differentials between different states: e.g. such as the costs of car insurance or credit cards.

 

People should have access to products available in another EU state, if those are cheaper and better suited to them. Physical obstacles like lack of acceptance of foreign ID cards or geo-blocking of access to certain websites should not stand between a consumer and their preferred provider.

 

Finally, more competition provides for more choice; more providers will be spurred to serve the interests of consumers. Hence the member states need to identify those barriers and work out how to overcome them.

 

Besides, the Commission’s priority is to ensure that poor behaviour does not go unpunished and that people who have lost out have somewhere to turn to when things go wrong; so to say, proper access to redress and dispute resolution systems. This means not just sanctions, but proper access to redress, where the situation is currently very diverse.

 

Some alternative dispute resolution systems can take binding decisions and award compensation, others can only issue non-binding recommendations. Although the Directive on alternative dispute resolution and the right to use online dispute resolution will help, not knowing what redress a person would be able to get in another country is one of the factors that would be likely to put people off buying services in another EU state.

 

The EU’s efforts for CMU’s transparency, possibility for choice and competition go numerous ways. First, CMU would make the market work for retail investors. Savers need better options for their savings; presently, money in the bank or under the mattress is, at best, not keeping up with inflation or, at worst, actually costing people money. Therefore, the EU intends to link savers and retail investors with investment opportunities and that's why individual savers and investors are essential to the success of the CMU.

 

Retail investors will only invest in capital markets if they trust those markets as well as the financial intermediaries operating in them, and believe they can get a better and a safe return on their savings. Effective consumer and investor protection will, therefore, need to be at the heart of the CMU.

Single EU rules for financial services in the member states. EU’s effective financial services are on the progressive path: ESMA, EBA and EIOPA have been given increased powers on investor protection through MIFID II and other EU regulations. The single rulebook for financial services has established clear obligations for investment firms to take care of their clients’ interests. There are specific rules on inducements and on packaged products; other provisions are aimed at providing clear and comparable information on investment performance.

 

There is more to be done, e.g. offering investors a wider choice among investment fund products, like the popular UCITS, and increasing competition between the funds which should lead to lower prices.

 

The work shall be done on the supervisory side so that investors see similar levels of protection and the benefits of the single market, irrespective of where they are or the nature of the investment products. This is not always the case at the moment, even where rules have been harmonised at EU level. Enhanced supervisory convergence is therefore one of the ingredients to strengthen investors’ trust in the capital markets.

 

The principles of transparency, choice and competition are the issues, which the Commission included in the Green Paper on retail financial services published at the end of 2015. These are going to be the guiding principles that the ESAs should rely on in prioritising work for the years ahead.

 

The EU is making efforts at having a single market in financial services for consumers’ benefit: e.g. access to the best products and services at the best prices, real choice, and solutions when things go wrong. The tools to achieve this are numerous: some things can be done with rules, some by removing barriers to competition and market entry that reduce choice and keep prices higher than they could be; some will be for the industry to take the lead.

 

The Commission and the member states have a common interest in bringing financial services back to the people they serve and consumers. Common measures are needed in the financial industry for the real economy, for financial stability and for a single market in capital.

 

Reference: European Commission, Speech “Bringing financial services back to the people they serve” by Jonathan Hill, Commissioner for financial stability, financial services and capital markets union, at Joint ESAs consumer protection day, Frankfurt, 3 June 2015. In:

http://europa.eu/rapid/press-release_SPEECH-15-5117_en.htm?locale=en

New EU financial instruments for innovative companies. At the first Innovative Enterprise Week (in Riga 2015), the EIB Group and the European Commission (EC) launched three new financial products in order to boost competitiveness in innovative companies. These programs were called "InnovFin- EU Finance for Innovators" or so-called InnovFin. The EIB and the EC have also expanded the InnovFin Advisory mandate, which will allow innovative projects and companies to benefit from the EIB’s financial and technical expertise in more sectors than before. New financial instruments will allow innovative projects and companies to benefit from the EIB’s financial and technical expertise in numerous innovative sectors.

 

Among the three new financial instruments, first is InnovFin brand aimed to help projects in cutting-edge sectors that might otherwise not be considered “bankable” during their pre-commercial stage. The second is in energy and infectious diseases: the InnovFin Energy Demo Projects will support first-of-a-kind industrial demonstration projects in the fields of renewable energy, as well as hydrogen and fuel cells. InnovFin Infectious Diseases will ensure that new drugs, vaccines and medical and diagnostic devices are made available faster to people who need them. These financial products allow projects with a higher risk factor to receive loans. About € 100 mln has been allocated initially to each product to kick-start the initiatives.

 

The third innovative financial product - InnovFin SME Venture Capital Facility, is launched by the European Investment Fund (EIF) as part of the EIB Group. It focuses on Venture Capital funds that target start-ups, which often find it particularly challenging to obtain financing. About € 430 mln allocation to early-stage funding will target enterprises located in EU-28 states and Horizon 2020 Associated Countries.

 

The EIF expects to invest in around 30 funds, helping to generate a total of investments in start-ups of up to € 1.6 bln.

 

The European Commission and EIB have also expanded the reach of the InnovFin Advisory mandate. This will allow a number of key sectors for innovation, such as bio-economy, circular economy and so-called key enabling technologies, to benefit from the EIB's advisory expertise and contribute to more innovation financing in coming years.

 

Giving these very important sectors easier access to finance and advisory services, especially with higher-risk projects, is crucial to bridge the investment gap in Europe and stay at the forefront of global competitiveness. The EU-EIB financial products will make innovative firms more attractive to private investors, while benefitting new businesses across European economy. 

 

Over the next seven years, InnovFin-EU Finance for Innovators will offer a range of tailored products to make more than € 24 bln of financing support for research and innovation (R&I) available to small, medium and large companies and the promoters of research infrastructures. This finance is expected to support up to € 48 bln of final R&I investments.

See: Innovative financing: new EU financial instruments to support innovative business

 

  = Quantitative easing in EU

The European Central Bank announced recently a large program of quantitative easing (QE), involving a purchase of over €1 trillion of assets (mainly government bonds) in the euro-zone countries. It’s a huge change from a conservative ECB’s position in monetary policy with possible strong effect for economy and business in the three Baltic States.

 

The ECB’s program of excessive liquidity is aimed at purchasing each month (from March 2015 until September 2016) of about € 60 bln of governments’ bonds. This is at a time of almost zero interest rates, slow growth and inflation in the EU. Besides, some say, the euro-zone states’ deflation threat has become too serious as well. The Financial Times argues that “whether this is a case of better late than never or too little too late”; it remains to be seen.  

 

Reference: http://blogs.ft.com/gavyndavies/2015/01/23/qe-ecb-mr-draghi-finally-delivers/

It has to be noticed that several central banks in the world have used monetary interference (the type of QE-programs) to tackle the 2008-crisis aftermath, e.g. first was the Federal Reserve in the US (and it made already three attempts to repeat QE), then the Bank of England, followed by the Bank of Japan, etc. The banking sector in Europe finally seems to be recovering, following another stress tests in 2014.  However, EU fiscal policy without QE seems very supportive for growth; it is not any longer becoming restrictive for the monetary policy either.  

 

EU’s financial markets have already positively assessed the QE which will continue until September 2016. Then, the ECB governing council will assess “sustained adjustments” with the inflation targets. Such assessments are within the ECB’s commitment to increase the balance sheet back to the early 2012 level. It might be difficult to measure with accuracy the QE program; however comparing with other countries it is seen that the increase in central bank assets was at the level of 15-25 per cent with rising inflation. 

Quantitative easing in Europe: effect for Baltics’ economy;   It is to be noted that QE doesn't work in a all economic systems; in some it creates money supply and inflation problems at the same time. Generally, the main way to create inflation in the real economy is through bank-led credit action, something that is difficult as banks are being regulated aggressively, restricting lending. The other way would be to give printed money directly to households. Printing money and hoping it dissipates throughout the system doesn't work when the mechanics of the capitalist system are suppressed, through regulation and low bond yields. See: Financial Times at:

http://blogs.ft.com/gavyndavies/2015/01/23/qe-ecb-mr-draghi-finally-delivers/

 

The QE’s program of the bond purchases has been evaluated in numerous EU states. Thus, e.g. while Germany has generally anticipated the idea, the Bundesbank  and other banks seem to have required that 80 per cent of the default risks should remain on the balance sheets of the national central banks, thus giving a signal that the EU monetary union is not quite stable. European economists have already hotly disputed whether the QE was necessary to prevent de facto fiscal risk-sharing via the ECB balance sheet and, if so, whether it undermines the monetary policy benefits of QE, argued the Financial Times.

 

Most economists seem to agree with ECB, that, in normal circumstances, the intended monetary easing is not compromised by the absence of full risk sharing. However, in a confidence crisis, this decision could add to speculation against the integrity of the single currency itself. That may be a price that the ECB thought was worth paying to bring “a large majority” of its governing council onside with the QE decision.  

 

Decision-making at the ECB, like in any other central bank, are routinely taken by a majority vote, sometimes a very small majority. But the Bundesbank has always had a special procedure.

The Financial Times mentioned that Bundesbank has no a veto in ECB, which is what matters for the effectiveness of EU monetary policy. And, in a separate vote, the German central bank has formally joined all the rest in unanimously agreeing that QE is a valid tool of monetary policy and important for the EU future economic progress.

http://blogs.ft.com/gavyndavies/2015/01/23/qe-ecb-mr-draghi-finally-delivers/

However, QE’s implementation needs some structural reforms in the eurozone states. Present QE has to be seen in line with the Commission’s € 315 bln investment fund’s idea published by the Commission in January 2015. Additional liquidity is regarded as an important stimulus for investment and activating internal consumption.

 

Needed progressive structural reforms will streamline perspective financial resources; as the ECB once said, “all measures are appropriate (“whatever it takes”). Structural reforms in the member states can make the market more flexible and dynamic. As soon as such reforms are going to be expensive, national banks shall use the QE liquidity for supporting such reforms. It is going to be big challenge for the Baltic States’ parliaments to adopt needed structural reforms aimed at growth potentials with more productive and competitive structural policies.

The absence of structural reforms in labour and product markets has driven the growth rate in the euro-zone to around 1 per cent (less than half of the US). Modern politicians have to recognise that structural reforms and monetary “accommodations” could easily go hand-in-hand; in fact, they should reinforce one another.  

 

Besides, the QE underlines the necessity for boosting growth through more flexible euro-zone’s budget rules (in the start of 2015, the Commission announced the plan of relaxing EU’s budget rules).  

 

However, there are some critical opinions about QE: experts from the Financial Times are of the opinion that QE could decrease bank lending, not increase it. The explanation is the following: euro-area government debt is about € 6.7 trillion, around 25% of that (€ 1.7 trillion) is directly held by banks, the remainder by investors, about € 5.0 trln.

 

Assuming that the ECB buys 30% of all euro-zone government bonds (about € 2.0 trillion) with the proportion to the current bank/investor ratio of 25%/75%, then the balance sheet of euro-zone banks will expand by € 1.5 trillion in reserves. Besides, about € 2.0 trillion are already converted into reserves (minus € 0.5 trillion of government bonds  on the banks balance sheet).

Source: http://blogs.ft.com/gavyndavies/2015/01/23/qe-ecb-mr-draghi-finally-delivers/

 

The Financial Times makes two suggestions concerning the effect of bigger balance sheet in the banking sector:

 

1) The banking sector has to raise equity capital to comply with leverage ratios. If you assume a 5% minimum leverage ratio, then banks would have to raise an additional € 75 bln in equity capital. The cost of equity capital is around 10% whereas they will not receive any interest on excess reserves, quite the opposite; QE could be regarded as “a tax on banks”.

Providing loans to corporations or consumers is also constrained as the banks have also to comply with liquidity provisions. Thus, after the member states’ banks have sold their liquidity to the ECB and given the liquidity constraints, the banks will rather decrease lending than to increase it.

2) Contrary to the intention of the ECB to increase lending, argue the Financial Times, QE could actually decrease lending.

 

Quantitative easing is not to be seen as panacea for European economy, especially in the euro-zone states, where bank borrowing dominates bond funding for private companies. Nevertheless, genuine progress has been made by the ECB for the monetary component of the EU economy; now politicians in the member states have to make adequate fiscal and structural components.

See: Quantitative easing in Europe: effect for Baltics’ economy   

 

Three Baltic States are having euro as a common currency. From January 2015, Lithuania introduced the single EU currency making euro a common currency among 3 Baltic States while increasing the number of euro-states to 19. European Commission Vice-President, Valdis Dombrovskis responsible for the common currency underlined that Lithuania's accession marked another important step of the Baltic States towards the EU’s political and economic integration. Baltic States’ euro-membership, in his words, will strengthen the economy of the region by making it more attractive to businesses, trade and investment.  

 

Commissioner for Economic and Financial Affairs, Pierre Moscovici underlined that in joining the euro, the Lithuanian people have chosen the area of stability, security and prosperity. He added that Lithuania had a strong track record of sound fiscal policies and structural reforms, which have delivered some of the highest growth rates in Europe, coupled with steadily falling unemployment. “The country is well-placed to thrive in the euro area”, he concluded.  

More on Lithuania’s adherence to euro: = Press release - Lithuania becomes the 19th Member State to adopt the euro; =Vice-President Dombrovskis' message on Lithuania joining the euro area; = The European Commission's website on Lithuania and the euro; = Lithuania's national changeover website.   

= Capital Markets Union

The EU Capital Markets Union (generally known as CMU) will mean better cross-border risk sharing via capital markets; it can help diversify funding sources for market participants across all EU countries and thereby enhance financial stability for the European region. CMU can play a pivotal role in boosting financial integration and in enhancing financial stability to the benefit of businesses, households and public finances across Europe.

 

The EU’s history can show numerous problems in the European financial market integration; suffice it to say that integration in capital markets (or free movement of capital) was the least developed integration aspect, though it originally meant to make the member states’ economic resources expand and ensure that the financial system would support growth and jobs.

 

At the European Financial Integration and Stability Conference (“Reinforcing financial integration on growth and jobs”, Brussels, 27 April 2015), European Commissioner for financial stability, financial services and capital markets union, Jonathan Hill, underlined the importance and necessity of the EU financial stability.

 

New financial market structures. During 2014, the EU has focused on another important part of the EU’s financial system, i.e. completing the Banking Union. Several positive things happened since: for example the Single Supervisory Mechanism, SSM has got off the ground in record time and started its work as single supervisor for the Banking Union. So is the Single Resolution Board, SRB, which becomes fully operational at the end of 2015. Finally, the European Banking Authority, EBA has helped build the EU financial supervisory cooperation.

 

The new financial market structures created in 2014 have been put to a tough test: the so-called Comprehensive Assessment, made up of the stress test and the asset quality review. The aim of these tests was to identify and address any remaining weaknesses in the EU banking system and to dispel doubts about their health. The results show that the European banking sector is now more resilient and much better capitalised, i.e. by over €200 billion in 2014 alone. The median EU bank participating in the Banking Union has capital ratios above 12% to deal with unexpected losses. These are similar levels to large banks in the US; moreover, the majority of financial institutions have “further buffers” to withstand future shocks, which should help to reassure investors.

 

Commission’s priorities. As a result of the new regulatory framework and the actions that supervisors have taken, European banks are becoming stronger. They are in a better position to get on with their primary business: lending to households and firms and financing the rest of the “real economy”. Nevertheless, it is too early to conclude that the EU has completed the regulatory efforts: the Commission’s prospective priority is still to make sure that all EU member states transpose into national law the Bank Recovery and Resolution Directive (BRRD) as an essential part of European instruments to break the negative spiral between failing banks and national/sovereign finances. 

In the beginning of 2015, only five EU countries have transferred BRRD into their national legislation; by mid-2015, there were 15 states. With an evident progress, the pace is low; hence, the Commission will keep pressure on the remaining EU states to commit to BRRD obligations.

 

Better regulation in financial services. The Commission takes a new approach to regulation too; under the leadership of the first vice-president Frans Timmermans, the Commission is working to legislate less and do fewer things better. In 2015, the Commission proposed/drafted only one fifth of the total number of new legislative proposals that the last Commission proposed on average each year. Moreover, the Commission intends to review over two and a half times as much existing legislation as was usual in the past.

 

The same approach will be applied to legislation in the area of financial services: less new legislation in the future is expected and more focus would be on bedding-in the reforms of recent years. The main idea behind this approach is that businesses need stability and regulatory certainty.

 

Over the last five years, the Commission was forced to legislate “at speed”, while the dangers of crisis were visible in the member states; however, the EU managed to make the financial system stronger. At present, there is a growing consensus that it makes sense to contemplate whether everything was made right all the time. It’s not about “fundamentals in approaches”, but seeing whether the combined effect of EU’s financial legislation always achieved the correct balance between stability and growth.

 

If the evidence shows that some of the rules are not proportionate to the risks posed by different types of institutions, or that there have been unintended consequences, then the changes shall be made. The member states need financial stability because that is the basis for sustainable growth. Besides, the states also need to recognise that the greatest threats to financial stability presently are through the lack of jobs and growth.

 

Commission’s competence in financial stability. Commissioner Jonathan Hill’s obligations stretch above the financial stability; they include capital markets union and financial services in general. The two last elements are closely interrelated: building a stronger single market in capital is a key part of the overall European efforts to boost jobs and growth. Capital markets, at its most simple pattern, are to provide more opportunities for savers and investors to be linked to providing growth. It is done by helping to increase investment, by making it easier for businesses to grow and by driving growth in the whole European economy.

 

Thus, by helping to create a more diversified and resilient European financial system, the Commission tries to reinforce financial stability. These two objectives are related and mutually supporting: both are needed in order to assist in delivering economic growth and jobs on a sound and sustainable basis.

 

Capital Markets Union and financial integration. Free movement of capital was one of the four fundamental principles on which the European Union was built. But more than half a century on from the Treaty of Rome, there isn’t a fully functioning single market for capital. Things took a step forward in the mid-1980s when capital account restrictions were removed in more and more countries, and accelerated in the late 1990s, when the euro was introduced. This sparked a wave of cross-border financial activity and pressure from market participants to remove the remaining barriers to integration.

 

Many of those barriers were removed with the help of the Financial Services Action Plan; but some of the achievements in financial integration had been lost during the crisis.

 

Integration in capital markets means making it easier for capital to flow and, crucially, saving the risks to be transferred across borders. It means that investment being channeled to where it can be used most productively, while market operators can take advantage of economies of scale to provide financial products and services in the most cost-effective manner. It can boost competition across borders, whereas providers can become even more cost-effective and consumers can benefit from wider choice. Integration in capital markets means making member states’ economic resources expand and ensure that the financial system supports growth and jobs.

 

CMU is not only about integrating markets; it has to safeguard financial stability too. Thus, firstly, it should help reverse the financial fragmentation that followed the recent crisis. In principle, integrated markets allow risks and benefits to be shared better across Europe.

 

For example, if a resident in a country A has financial assets from countries B and C as well as A, he/she will be more sheltered from possible shocks that can hit his domestic economy. A lack of international diversification often leads to a much deeper and longer crisis in individual countries, because there is a vicious feedback loop via the domestic holders of financial assets.

 

Looking back in the EU’s history, it becomes clear that there were problems with the nature of EU financial market integration that took place before the crisis. While there were massive cross-border flows between EU countries, little risk was actually transferred. Instead, risk was retained in those countries that were tapping external funding. This pattern was amplified by financial institutions that were ill-prepared to channel the pools of funds on such a scale and the EU’s governance frameworks were ill-suited to deal with them.

 

With the crisis, financial integration itself went into reverse. Risk was created and retained in some EU states to such an extent that foreign investors were discouraged from rolling over their funding or from continuing to invest. As a result, financial flows collapsed.

 

Presently, the situation is such that some EU member states have no shortage of funding, while others are stuck with failed projects and don't have the funding to initiate new ones. This uneven distribution in access to funding has created serious problems for many EU states, depressing economic growth and creating financial vulnerabilities.

 

European reforms of financial governance, including the Banking Union and European Semester, were necessary to restore confidence in financial markets and help repair banks' balance sheets so that they resume sustainable lending.

 

A Capital Markets Union, which will mean better cross-border risk sharing via capital markets, can help diversify funding sources for market participants across all EU countries and thereby enhance financial stability for the EU as a whole.

 

Secondly, CMU can strengthen the resilience of the EU financial system by giving companies access to more diverse funding sources. It is known that the Europe’s financial system is relatively bank-based, particularly when compared to other developed economies. This has left some parts of the EU economy less capable in generating growth and jobs, as a number of banks have been recovering slowly from the enormous damage inflicted by the crisis.

 

As to the CMU, it is necessary to see that there is a dichotomy between bank-based and more market-based financial systems; the sound economy needs both. Bank-based funding has many strong sides (not least the close relationship that some banks have with their clients, including SMEs). But the crisis has clearly demonstrated that there is a risk in having too many eggs in one basket. A more diversified financial system – with a better balance between direct and indirect funding channels – would be more resilient and strengthen the capacity of Europe’s economy to handle any future crises.

 

In creating CMU that achieves these dual goals of integration and stability, the member states need to ensure that people can have confidence that capital markets are governed by appropriate rules. It is not true, as some contend that while banks are subject to tight regulation, capital markets are a "wild west" free-for-all. There are some regulatory instruments in the EU, e.g. MiFID, EMIR, and rules governing different categories of investment fund. This is a highly regulated area, with a view to protecting investors by making them aware of risks and ensuring that there is proper governance and oversight.

 

Capital Markets Union: step by step creation. It is not an easy task to create a sound single market for capital; it is a long-term project that will require sustained effort over many years. And it will need to be approached from many different angles: securities laws, investment restrictions, tax treatments, insolvency regimes, etc. These are all issues that have to be brought into consideration, and the member states’ economies need “single market for capital” urgently. 

The approach to CMU shall be through adequate economic analysis and with practical input from the financial services industry and member states in order to identify and understand barriers and obstacles. The European Financial Stability and Integration Review, which has been launched at the end of April 2015, helped with that analysis.

 

Informal ECOFIN in Riga (April 2015) generally supported both the CMU in general and the Commission steps to combine long term ambition with a great sense of urgency, while identifying a number of areas in making quick progress.

 

Getting the market for securitisation again into European financial sector could free up banks' balance sheets so they could get back to lending, which is their core business. Commission’s aim is to support a framework for securitisation, singling out a category of highly transparent, simple and standardised products. Such approach is strongly supported by the ECB, the Bank of England, Basel institutions, etc. Securitisation will not be the answer to all European challenges, and bank finance is not always the most appropriate source of funding, for instance for higher risk, higher growth companies. Therefore, the Commission wants to encourage different solutions like venture capital or IPOs that will support different types of business at different stages in their development.

 

Besides, the Commission also wants to revise the Prospectus Directive so that it becomes easier for SMEs to fulfill their listing obligations. The Commission is also looking at what could be done to make SME’s credit information more accessible to potential investors, without imposing unnecessary administrative burdens on them.

 

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; the Commission supports this, in part because legislation is not always the best option.

 

The Capital Markets Union (CMU) aims to complete initial European efforts to free movement of capital as “a forth EU’s fundamental freedom”: it means to take down barriers, remove obstacles and improve Europe's system for investors and for companies that need financing.

CMU can play a pivotal role in boosting financial integration and in enhancing financial stability to the benefit of businesses, households and public finances across Europe. CMU is supported by the European Parliament, by most member states and businesses, both those keen to invest and those keen to attract investment. No one is underestimating the scale or the complexity of the challenge. The Commission in 2015 has elaborated a plan to set out EU’s longer term priorities as well as concrete proposals for immediate action.

 

On 30 September 2015, the Commission adopted an action plan setting out 20 key measures to achieve a true single market for capital in Europe. It aims to mobilise capital in Europe to channel it to all companies, including SMEs, and infrastructure projects that need it to expand and create jobs. By linking savings with growth, it is expected to offer new opportunities for savers and investors, lowering the cost of funding and making the financial system more resilient. The action plan has received different approaches by policy-makers and by capital markets’ actors. However, that doesn’t shake the main idea of CMU to revive growth across the EU and increase CMU’s potential for companies in countries experiencing difficulties in accessing finances.

 

Reference: Speech by the European Commissioner for financial stability, financial services and capital markets union, Jonathan Hill at the European Financial Integration and Stability Conference “Reinforcing financial integration on growth and jobs”, Brussels, 27 April 2015. In:

http://europa.eu/rapid/press-release_SPEECH-15-4861_en.htm?locale=en  

 

- Capital Market Union: advantages and challenges.  

The Commission has identified during 2015 three most important CMU’s themes: increasing funding options for business, creating more opportunities for investors, and encouraging cross border investment. These are the main features of the Commission’s Action Plan for CMU.

There were three most important issues involved in efficient CMU.

 

1. Increasing access to finance. In general, the first CMU’s priority is to improve Europe’s funding, i.e. to build a financial system that is better able to meet the businesses’ financing needs (from the smallest micro-firm to the largest listed companies), at different stages in their development.

 

Bank lending remains central both to the European economy and, in particular, to the sources of funding for SMEs. A major problem in the “funding escalator”, which is so far missing in Europe, is that alongside more innovative new businesses with higher returns, also higher risks emerge, which make it hard for SMEs to get investment from banks.  

 

Although overall, the financial system in the EU provides some two trillion euros to SMEs, non-bank finance is less than half of that in the US. A large majority of SMEs have mentioned missing key links in the delivering on the potentials, e.g. angel investing, venture capital and innovative forms of finance such as equity crowd-funding.

 

A range of factors that cause this in EU, including cultural, historic and regulatory can explain. Thus, the Commission promised to review the EU venture capital regulation (so-called EUVECA) to support the growth of this market further- both in terms of allowing a wider range of funds to participate, and a wider range of possible investments.

 

One idea is to eliminate “pass porting barriers” to funds for raising capital across Europe. It is known that the factors holding back an equity culture in the EU are broad and deep but strengthening EU’s venture capital ecosystem must be a key priority.

 

Another issue in this direction is the non-bank lending channels to play the role of “peer-to-peer lending”, e.g. a kind of alternative investment funds, as present long-term funds (ELTIFs) play in the financial system. But then, the availability of funding has to increase while maintaining investor protection and financial stability. In recent years some steps have been taken through MIFID II, EMIR and AIFMD to strengthen the regulation of non-bank finance.  

 

For larger firms in the member states it shall be easier to raise capital by issuing debt or equity on public markets. The Commission thinks that more could be done to build on the success of private placements in Germany and France for companies wishing to place large amounts of debt with institutional or qualified investors. Most companies think that more time should be give to recent market-led initiatives by the industry to allow them to bear fruit rather than regulating.

Some investors pointed out that there are some ambiguities in the regulatory treatment of private placements. They have asked the Commission to look at aspects of Solvency II in order to support insurance companies to invest through private placements. And they have identified the issue of national divergences in the treatment of withholding tax as a potential obstacle to the development of a deeper cross-border market for private placements.

 

One of the strongest messages from the business community (and the Commission supported this view) that getting the Prospectus Directive right will be an important early priority. As the gateway to capital markets, the EU need to make sure that prospectuses fulfill their original purpose: giving investors information they can understand before making an investment decision.

 

Business confirmed how valuable prospectuses are, and the role national authorities’ prior approval of prospectuses plays in giving legal certainty and supporting investor protection.

But many think that the EU should lighten the burden on issuers who are already listed on a regulated market when they want to make a secondary issuance. They want the prospectus regime to have a more joined-up approach to information that is already published under other rules. They also argued that the lighter disclosure regime for smaller companies has had virtually no take-up. Therefore, the Commission needs to take a radical look at how the prospectus directive is working, particularly for smaller companies and smaller countries in Europe.

 

Another important issue is to promote simple and transparent securitisations. Alongside the CMU, the Commission has a very broad support for the idea: the EU plans to build on the work of the ECB, Bank of England, IOSCO, and the ESAs to put forward a framework for securitisation. The Commission aims to rebuild trust and make it easier for investors to assess the risks of securitisations. Issuers will have to maintain ‘skin in the game’ so that their incentives are aligned with those of their investors. The products will have to be transparent, so investors will know what they will be buying. The system should work with all the appropriate checks and balances, without being too complex.

 

This will enable the Commission to put in place more appropriate capital and solvency requirements for investors (so that simple securitisation products do not end up being penalised); it will also allow to improve the way existing due diligence and disclosure rules currently work.

 

2. Creating opportunities for investors. The second main issue is creating opportunities for retail and institutional investors, who are background of the whole CMU’s idea.

 

Life insurance companies and pension funds are the natural long-term investors in European equity, venture capital and infrastructure. They have the deep balance sheets and the long time-horizons to be able to manage significant exposure to equity investments.

 

Over recent years, however, these institutional investors have been retrenching, and holding more significant amounts of liquid debt at the expense of equity. There is a concern on the part of some EU states, the insurance industry and other observers that the regulatory framework may indeed be driving this tendency.

 

In October 2014, the Commission gave insurers a number of incentives for long-term investment in the detailed rules under Solvency 2; however, still more could be done to ensure that insurers can invest into Europe's infrastructure. The Commission intends soon to start the process of amending the Solvency II delegated acts to incorporate investments into ELTIF funds, together with the process of necessary changes to incorporate infrastructure as an asset class into Solvency II (after EIOPA reported on the issue later in June).   

 

Pension funds are one of the biggest potential sources of funding for equity and infrastructure investments. The IORP-2 proposal currently being discussed would give pension funds the freedom to invest in assets with a long-term economic profile on unregulated markets; the EU states have already agreed their position on IORP-2.

 

Personal pensions, too, offer the potential to inject more savings into the capital markets and channel additional financing to productive investments. Many want the Commission to look at ways of encouraging and supporting people to save more for retirement. There is also the question, whether the EU should consider the feasibility of a standardised product, e.g. through an optional pan-European or '29^th ' regime. This could remove obstacles to cross-border access without forcing cross-border harmonisation on what is a very diverse market place with very different legal systems in place. Any changes would need to ensure consumer protection and not disrupt existing systems which are working well.

 

Retail investors need to be at the heart of the CMU; over the years, small investors have been reducing their investment in shares: the proportion of retail investors among all shareholders is less than half what it was in the 1970s.The reasons for this are varied, but particularly, because of a lack of trust. Retail investors will only invest in capital markets if they have confidence in those markets and the financial intermediaries operating in them, and if they believe that they will do better by investing than sticking their money under the mattress. More transparency is therefore a key in this issue. Significant progress in recent years has been made to increase transparency, improve and harmonise disclosure standards. A careful look has to done at whether this improves results for consumers and ensures standards are consistency across financial products. Retail investors should also be able to choose good products that meet their needs regardless of where it is being sold in the EU. Effective consumer and investor protection and dismantling the barriers to the single market for retail investors will therefore need to be at the heart of the CMU.  

 

3. Dismantling horizontal obstacles to cross-border investment. Retail investors are not the only ones who come up against barriers to the single market: there are many long-standing and deep-rooted obstacles that stand in the way of cross border investment. The obstacles range from their origins in national law (e.g. insolvency, collateral and securities law), through obstacles in terms of infrastructure like a lack of access to credit data, particularly for SMEs, and through tax barriers.

 

On some of these issues, particularly those linked with taxation, the feedback suggests that the Commission should be pragmatic: i.e. it shouldn't risk making good progress in other areas by charging head long into some of the most intractable ones. But this is an area, in which the Commission need to see if another way can be found to address barriers in respect of withholding tax procedures, e.g. on problems of double taxation. Many CEOs also said that the current bias in the tax system towards debt at the expense of equity is a barrier to the development to capital markets.

 

The same goes for barriers to cross-border investing caused by differences in insolvency proceedings. One way forward would be to identify existing best practices that could be exported and work to stimulate cooperation between national authorities, or targeted changes where they can be helpful.

 

Many businesses also made the point that as the EU capital markets become more developed, there would be needs for the appropriate supervisory arrangements, both nationally and cross border.  They also mentioned that further actions by the ESAs are needed, within their existing powers, to promote supervisory convergence so that the benefits of the single rule book and deeper capital markets can be shared by all. As markets develop, the Commission must be sure that macro prudential frameworks at national, the EU level and internationally are able to react appropriately to developments in the capital markets.

The Commission intends to propose early actions, which would include a comprehensive package on securitisation with updated calibrations for Solvency II and CRR, the definition of infrastructure and revised calibrations for Solvency II, and the proposals to review the Prospectus Directive.

Reference:  Capital Market Union: advantages and challenges. 09.06.2015. In: Capital Market Union: advantages and challenges

 

= CMU’s differences in the EU and US

The trans-Atlantic treaty between the EU and US includes financial issues as well. Hence the interest in comparing capital markets on both sides of the Atlantic. It is apparent that Europe's capital markets are less developed than those of the United States; it lies in the historic circumstances and ways the financial services have developed in the US and EU, as well as in the legal systems’ differences and custom practices.

 

For example, in the EU merchant banks had acquired an important role in commerce and trade already in the middle ages. These banks were established by the time of industrial revolution and have been well functioning in financing economic expansion. Thus, at the end of the 18^th century, European savings banks became the custodians of a growing volume of household savings. Thus, with a strong banking sector, there was less of a need to develop capital markets in many European countries.

 

In the US, on the contrary, banks only came into existence at the end of the 18^th century. The need to finance the country's high public debt in the early 19^th century helped the development of capital markets, while legislation brought in after the great depression limited the growth of banks. In Europe, two world wars hugely reduced the stock of capital that markets had to draw upon.

 

However, the EU's economy is today about the same size as America's, but the EU’s equity markets are less than half the US’s size. In the US, SMEs get about five times as much funding from the capital markets – or non-bank financing – as they do in Europe.

According to the European Capital Markets Institute research, European households – compared to that in the US – have more than double the amount of their savings in deposits, but half as much in investment funds and shares.

Bank-based financial systems can have real strengths like the relationship that banks can develop with local companies. But the financial crisis showed that the EU’s capital markets were not developed enough to fill the gap left by a bank sector unable to lend at normal levels. European SMEs receive 75% of their funding from banks; European companies are four times more reliant on banks than American ones. Therefore, a drying up of bank lending like the one the EU member states experienced in 2008 has had a devastating impact.

Commission’s plan. At the heart of the Commission’s action plan is a drive to build a system that meets the financing needs of European businesses at different stages in their development, to remove barriers to small firms raising money from capital markets, and better connect information on investment opportunities in SMEs to investors in the world.

New funding methods ranging from money-lending and donor platforms, to investment-based crowd funding or support from business angels shall be discussed for companies in their start-up phase. For companies in early expansion phase deeper venture capital markets would offer entrepreneurs more options. It is important to look at how tax incentives for venture capital and business angels can foster investment into SMEs and start-ups.

The EU needs to improve the connections between retail and institutional investors, which represent “the fuel in the tank of the CMU” to companies and infrastructure projects.

Better information and advice is needed if retail investors are to invest on capital markets. Information should be available in a form that can be compared across investment products. This builds on a comprehensive assessment of European markets for retail investment products, including distribution channels and related services. The assessment will identify ways to improve the legislative framework and decide on how best to exploit the new possibilities for new advisory services offered by online providers and fin-tech.

The Commission already acknowledged existing European system that allowed investment funds to operate across the EU, but it did not work as well as it should. Thus, there are 36 000 UCITS funds in the EU, four times the number of mutual funds in the US, and of a much smaller average size. Commission’s idea is to create a proper European “passport system for investment funds” to increase competition and choice for European citizens.

Personal pensions have the potential to inject more savings into capital markets and channel money to productive investments. Yet the EU has no single market for voluntary personal pensions, which means that the EU is missing out on economies of scale which in turn limits choice and pushes up the cost for savers.

In 2016, the Commission will start the work to determine exactly what is needed to establish a European market for simple personal pensions, finding out whether or not EU legislation can help to underpin that market.

Commission’s Action Plan also sets the EU’s approach to long standing cross-border barriers to the free movement of capital. These range from differences in national laws on insolvency, tax and securities through to obstacles arising from fragmented market infrastructure. The consultations will proceed on key differences between insolvency and early-restructuring regimes across the EU. By the end of 2016, the EU will bring forward legislation to align insolvency proceedings better across the EU while seeking to address the current bias in the tax systems that would make it cheaper to issue debt rather than equity.

Together with the European Supervisory Authorities (ESAs), the Commission intends to strengthen supervisory convergence and keep a careful eye on the possible emergence of any new risks. The rules of the game need to be consistent regardless on the member states so that financial stability is safeguarded. The long-term vision shall be combined with urgent early measures to generate momentum and build confidence; hence, the Commission proposed initially six initiatives.