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

Commenting on the first anniversary of the Single Supervisory Mechanism, SSM, Commissioner Jonathan Hill, responsible for the EU’s financial services underlined that the Union’s supervisory tasks have been smoothly transformed from national authorities to the EU level. However, he added, completing regulatory framework would need additional efforts. 

A year ago, an important step towards banking union was made: the European SSM took over the supervision of some 6000 European banks (with about 9 banks in the Baltic States). Commissioner Jonathan Hill stressed at the European Central Bank Forum on Banking Supervision in Frankfurt that through the transition of supervisory tasks from national authorities to supra-national authority the SSM has become an integral part of the EU financial control.

Micro- and macro-considerations in economy

Finances and economy are closely integrated: global forecast shows that growth will be lower in 2015; growth in emerging and developing economies – important EU’s export markets - is expected to slow for the fifth year in a row.

However the EU’s economy is growing, but not fast enough: over 23 million people are out of work, one in five of whom is under 25. The EU has an ageing population with increasingly fewer people in work to support it.

Given these challenges, the Commission will try to provide a right balance in the financial sector between managing risk and encouraging growth to reconcile micro- with macro-considerations in economy. Hence, micro-prudential supervision needs to be complemented by a macro-prudential perspective.

SSM and SRM’s: main tasks

One of the earliest SSM’s tasks was to carry out the banks’ comprehensive assessment. It confirmed that European banks had become more resilient and better capitalised. EU banks' ratios now stand at 12%, e.g. at similar level to the United States. When shortcomings were identified, work was put in hand to plug the gaps. In this way, the broader response to the comprehensive assessment also confirmed that people had confidence in the SSM's potentials.

At the same time, the SSM helped to build a more consistent approach to supervision. Though the task represents a gradually proceeding process, good progress has been made to harmonise EU options and national discretions; one has to compare both in order to make an effective supervisor, argued Commissioner Jonathan Hill.

The Single Resolution Board is up and running; the board’s team is busy doing the spade work so that the second leg of the Banking Union - the Single Resolution Mechanism, SRM - can be fully operational in January 2016. This means that if, despite the SSM’s strengthened supervision, a bank fails in the EU, and the SRB will manage its orderly resolution.

These steps forward, delivered in record time, have made the EU banking system stronger while protecting European tax payers.

Completing regulatory framework

It’s important that all EU states have implemented the Bank Recovery and Resolution Directive in full. This is an essential part of the EU financial regulations (the Single Rule Book) on which the Banking Union rests. A common backstop needs to be agreed for the Single Resolution Fund in case an emergency arises that exceeds the fund's capacity. More immediately, the EU and the states need a “bridge financing mechanism” for the fund while it is being built up.

At the same time, the member states also need to transpose the Deposit Guarantee Scheme (DGS) Directive, guaranteeing up to 100 000 euro per depositor per bank.

The Commission will be keeping pressure on the states to live up to their commitments in these areas. Before the end of 2015, the Commission will table a proposal for a European Deposit Insurance Scheme. In the original proposal for the Banking Union it was always mentioned that there would be a third leg – a mutualised deposit insurance scheme.

The new proposal is based on a reinsurance approach and will build on the member states’ existing schemes. It will supplement national deposit guarantee schemes and provide funding when national schemes are unable to handle large local shocks. This will help break the link between banks and national governments, and reduce the risk of instability across the Banking Union.

Commission’s first anniversary: three single market projects

Starting its work a tear ago, the Commission promised “to do things differently”; for example, it had been legislating less while legislating better. It brought in 2015 only one fifth of the legislation that was typical in work programmes of an average year under the previous Commissions. Frans Timmermans announced in October 2015 that next year even less legislation would be introduced. In the area of financial services less new rule making and a period of greater stability is expected.

Everything is done to approach the priority of jobs and growth: within months of coming into office, the Commission launched €315 billion plan to support investment. It pressed ahead with free trade agreements, not just with America but also with Vietnam, Canada, Japan and New Zealand.

Above all, it is pushing to unlock the single market's full potential with a clear plan while launching three single market projects: in energy, in the digital economy and in the area of capital markets. Bigger markets, more competition and more trade are at the heart of the Commission’s new approach said the Commissioner.

European Systemic Risk Board

The EU financial rules have made bank balance sheets more robust; the next step is to focus on the big risks that might be missed at micro level. Given Europe's growth challenge, these rules should not have any unintended consequences. A lesson of the crisis is that while supervisors focused on narrow areas of financial activity, there was too little attention paid to how all these sectors were interlinked.

That was the reason to create the European Systemic Risk Board: to focus on the collective behaviour of financial institutions, on potential knock-on effects between them, and on how the financial sector can influence and be influenced by the wider economy.

In good times the banks need macro-overview “to lean against the wind”, to question prevailing trends, and prevent the build-up of systemic risk; in more challenging economic times, like the present ones, the opposite is true. Everyone agrees financial stability is a prerequisite for sustainable growth; it is also true that financial stability rests on a sustainable growth. The lack of strong growth is itself the biggest threat to long term stability in the EU.

The EU has to strike the right balance between managing risk and enabling investment. That means that the EU has to review the financial legislation to make sure that the combined effect does not impede growth.

Rules in the financial services sector

Seven years after the collapse of Lehman Brothers, it is therefore reasonable to see whether the EU efforts in financial behavior and economic growth have materialised concerning the level of growth and banks’ role in the market.

The Commission has launched a call for evidence that will run until the end of 2015 on the cumulative impact of rules in the financial services sector. Regulatory consistency, coherence and certainty are key factors for investor decision-making. The EU has to change the rules, if there are unnecessary regulatory burdens that damage investment factors or/and there are duplications and inconsistencies.

The Commission has already launched a review of changes that have affected banks’ ability to lend to businesses, infrastructure development, and other long-term investment projects. In particular, all the recent changes that have affected banks' ability to support local businesses.

The European Central Bank and European Banking Authority are working to re-launch European securitisation markets as one of the Capital Markets Union’s instruments: this is done to help diversify funding sources, free up bank lending for the wider economy and increase the amount of credit available.

The Commission proposes a new framework to encourage the take-up of simple, transparent and standardised securitisation, which would define a set of criteria and apply lower capital requirements when a securitisation meets those criteria. By providing this clear definition of simple, transparent and standardised securitised products, the member states can support investor confidence and lighten administrative burdens. Rebuilding the securitisation market to pre-crisis levels would amount to an extra € 100 billion of investment for the EU’s economy.

In order to support the Commission’s Investment Plan, investment in infrastructure must be made more attractive to institutional investors. The Commission will create an asset class for infrastructure investment and lower capital requirements associated with it by 30%.

These initiatives are just some of the first actions to build a Capital Markets Union. Put simply, CMU aims to connect savings to growth, and broaden the financing options that are available to European businesses so that they can grow and create jobs in Europe.

A more diversified financial system will also help us to handle financial crises better in the future. An economy that is heavily dependent on bank funding – as Europe has traditionally been – will be hit hard if there is a contraction in that sector.

A well regulated Capital Markets Union means better cross-border risk sharing via capital markets. It will help diversify funding sources for financial market participants across all EU countries and increase financial stability in the EU-28.

The steps forward would include constant control on the SSM and the ESRB working, making the right balance between micro and macro prudential regulation while providing Capital Markets Union with increased funding for European businesses and help spread financial risk.

The Commission task is to build a stronger and deeper single market for capital, to strengthen banking union, to build a more resilient banking sector to maintain financial stability and to support growth across the whole EU.

Reference: European Commission, Speech-15-5985 “Bank Supervision: Europe in global context”, by Commissioner Jonathan Hill at the European Central Bank Forum on Banking Supervision, Frankfurt, 4 November 2015. In:  

http://europa.eu/rapid/press-release_SPEECH-15-5985_en.htm?locale=en