Capital Markets Union: Is There a Need for Further Integration of EU Markets?
Ten years after the outbreak of the financial crisis, capital markets in Europe are far from being harmonised and integrated. Many issues identified in the early 2000s regarding regulation and supervision in financial markets remain unaddressed. The current and future challenges the EU is and will be facing (such as Brexit and the revision of the European system of financial supervision) could give momentum to a process of more centralisation of powers at a European level.
EU and national policymakers, academics, and industry representatives expressed their views on why capital markets in the EU must be stronger and more integrated during the high-level conference, “The Future of Capital Markets in the EU: Towards Deeper Integration?,” organised by CFA Institute at the European Parliament in Brussels on 6 June, 2018.
In her introductory remarks and welcome, Josina Kamerling, Head of Regulatory Outreach EMEA at CFA Institute, quoted Napoleon Hill, American self-help writer, who said, “The moment you commit and quit holding back, all sorts of unforeseen incidents, meetings, and material assistance will rise up to help you. The simple act of commitment is a powerful magnet for help.” This approach should also be used in the European harmonisation process.
Kamerling advocates that it is time to be bold and commit to deeply integrating capital markets in Europe. Trust in financial markets is at its lowest ebb, mostly due to the recent cases of mis-selling of financial products and general malpractice in the financial sector. This lack of trust was also underlined by the Vatican in a letter published last May. To reconnect finance with people and society, capital markets should be regulated and supervised in a way to better stimulate investors.
Jacques de Laroisière, Chair of the 2009 High-Level Group on Financial Supervision in the EU, and John C. Berrigan, Deputy Director-General of the Directorate for Financial Stability, Financial Services, and Capital Markets Union (FISMA) of the European Commission, delivered keynote speeches at the beginning of the event.
de Laroisière stressed the tremendous need of deep integration in capital markets in Europe, where 75% of European funding is financed by the banking sector, and only 25% by markets. The situation in the United States is completely the opposite: banking sector funding represents only a minimum fraction of financing. de Laroisière added that a more liquid and open European capital market would benefit our economies and contribute to increasing the level of investments in the EU as well as operating as a remedy in case of asymmetrical external shocks in the European Monetary Union (only 20% of shocks are smoothed through capital markets flows in the EU).
The European Commission recently put forward a proposal on the review of the European system of financial supervision; the system was introduced in 2010 and consists of an authority (the European Systemic Risk Board) overseeing EU financial markets from a macroeconomic level and three European Supervisory Authorities (ESAs) that are in charge of the microprudential supervision of EU markets. The European Commission proposal is very ambitious, as it contains drastic changes in the direct powers of the ESAs [and, in particular, of the European Securities Markets Authority (ESMA), which has the mandate of contributing to a higher level of investor protection and promoting stable and orderly financial markets] and in their governance and funding. However, many member states oppose this approach by arguing lack of justification for central supervision, since more direct supervisory powers at the EU level would dilute the expertise of national authorities in national markets.
The current situation and its wide number of supervisory practices hampers the achievement of a credible and effective Capital Markets Union in the EU. The need to have a supervisory convergence in the EU is the main reason for the Commission proposal on the overhaul of the ESAs.
Berrigan explained that in the aftermath of the Brexit referendum, there is a new rationale for the Capital Markets Union: without the United Kingdom in the bloc, the EU financial system will be relying even more on the banking sector for funding. Consequently, the system could be more vulnerable in times when bank lending tightens. A Capital Markets Union should allow firms to finance their activities through a variety of capital sources.
Moreover, as mentioned in the EC Communication published on 20 September 2017, regulating and supervising cross-border financial activities should facilitate the conduct of such operations and reduce the impact of a greater number of contagion channels, in case of adverse shocks, on member states.
de Laroisière argued that the ESAs should have more arbitration and investigation powers to use in different cases such as cross-border controversies and breaches of EU law, and their governance must be profoundly revised. He suggested the appointment of two or three independent figures in the existing ESMA Management Board (which carries out all missions and performs ESMA tasks) to guarantee more independence of such an assembly. In addition, the Management Board mandate could also be extended to supervisory convergence issues.
Looking ahead to when the United Kingdom will officially leave the EU, de Laroisière remarked that cooperation at the European level must be the keyword. Europe will remain one of the main financial markets on the globe, but the EU needs better rules and supervisory practices. In particular, the European financial markets would benefit from a successful devolution to the ESAs of the management of interaction and (monitoring of the activities) with third countries.
In his closing keynote speech, Marco Lamandini, Professor of Commercial Law at the University of Bologna, emphasized that the Capital Markets Union and the Banking Union go hand in hand. However, due to the uneven development stage of these two projects, having only one institutional model is not enough in the European financial system. As the High Level Group on financial supervision in the EU indicated, the EU should evolve towards a system which would rely on two Authorities, one responsible for prudential issues and financial stability, and the other for conduct of business and market issues. Within this system, increased supervisory powers and tasks of ESMA would allow an easier functioning of the coordinated supervision with the National Competent Authorities.
Video: Josina Kamerling, CFA Institute, speaks on the current state of Capital Markets in the European Union.
Video: Jacques de Laroisière shares his views on the current state of Capital Markets in the European Union and the future of the European system of financial supervision.
Video: John Berrigan discusses the Action Plans on Capital Markets Union and Sustainable Finance, and the implications of Brexit.
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Photo Credit: ©Roberto Silvestri