Brussels, 19 May 2017
Joint conference of the European Commission and the European Central Bank on European Financial Integration
Ladies and gentlemen,
It is my great pleasure to have the opportunity to welcome you all to Brussels and the 2017 European Financial Integration conference.
For companies around Europe, spring is reporting season and a time to discuss future prospects. In the same way, it is becoming a tradition that the European Commission and the European Central Bank together review recent developments in Europe's financial system.
Current developments take place against the backdrop of an economic recovery that is gathering pace. In its latest economic forecast for EU GDP, the Commission raised expected growth for both 2017 and 2018 to 1.9% each year. For banks, steepening yield curves and improved resilience of the sector overall are encouraging signs, and accelerating credit growth indicates that they are becoming more supportive to growth.
These results prove that our policy mix of investment, structural reforms and responsible fiscal policies is working. We need to continue along this path.
At the same time, we shouldn't lose sight of existing vulnerabilities. In Europe, high debt levels, weak productivity growth, and demographic trends remain challenging economic headwinds. Unemployment is still above pre-crisis levels. We are facing political and economic uncertainty abroad, and new geopolitical challenges, from the migration crisis to conflicts and instability in our neighbourhood. For the first time, a Member State is leaving the EU.
There is therefore no time to rest on our laurels. With the White Paper on the Future of Europe, the Commission has already set in motion the much needed debate about the EU's future. We recently published papers on Europe's social dimension and the need to harness globalisation. Next, we will look at the Economic and Monetary Union.
The future of Europe's financial sector is part of these reflections. We stand before a choice. We can either take decisive action towards completing Banking Union and Capital Market Union, or we will have to live with the consequences of fragmented markets and supervisory arbitrage.
When voters at the polls in recent national elections were given the fundamental choice between integration and disintegration, a majority of them made a clear choice. A choice for openness, for pooling of our strengths, and for economic cooperation, and against erecting borders and looking inwards.
This is also the right choice for Europe's financial sector. We need to take decisive steps towards financial integration within the EU.
Only as an integrated market do we have the strength to finance our economies. By joining up our financial markets, we can help firms across Europe scale up, become more productive, and create jobs in the process. We can learn from the United States on this – based on a large integrated home market, US investment banks and US asset managers have become among the most successful in the world.
Only as an integrated market do we have the depth and liquidity for markets to function efficiently. Without the United Kingdom, EU equity markets make up about 15% of world markets in capitalisation. We need to combine our efforts to strengthen instead of splitting up in 27 national pools. A deeper and more liquid market could increase choice for consumers and attract more capital from foreign investors to the EU. It could also lead to lower prices and reduced costs, thanks to increased competition and economies of scale.
Only as an integrated market do we have the scope for innovative finance to develop and scale up. With larger customer bases, there is more reward for fintech applications that process customer data, and enough market niches for innovative players to experiment. With a larger pool of capital, risky projects also stand a better chance at finding investors that understand when the risk is worth taking. After all, you need a crowd to crowd fund.
Only as an integrated market, for those Member States sharing the euro, can we improve transmission of monetary policy and better absorb asymmetric shocks by sharing financial risk across countries. This is how we can create a more resilient financial sector.
Ladies and gentlemen,
The report we are presenting today is about financial integration and stability. Both go hand in hand, if integration is matched by common rules and ambitious supervisory convergence.
With our single rulebook and our European financial supervisory system in place, together we are regulating and supervising risks more effectively. We are pooling our resources and expertise to ensure world class supervision which also keeps up with technological and market developments. And we leave no room for gaming or arbitrage. This is especially relevant as a number of companies are currently reconsidering their corporate structure in light of Brexit.
The Commission is already fully devoted to integrating EU financial markets, bolstering financial stability and boosting investment. These are the main objectives of our two flagship projects of Banking Union and Capital Markets Union, which I will turn to now, starting with banking union.
Since the crisis, we have come a long way. We have put in place a single rulebook for all financial actors in the European Union. In the euro area, we created Banking Union to tackle the excessive link between Member States and their banks, in favour of a truly pan-European banking system. We now have the European Central Bank as the central prudential supervisor and a Single Resolution Mechanism to manage a resolution effectively, should the need arise.
Today's report points to signs that the link between sovereigns and banks is indeed loosening. Following an upswing during the crisis, banks now tend to hold fewer domestic government bonds. And we see positive developments in the price of bank bonds, which are starting to decouple from sovereign ratings. Investors attach increasing importance to the standing of bonds among the hierarchy of banks' creditors compared to the rating of the associated Member State.
These developments go in the right direction, but further steps are necessary to achieve a truly integrated and diversified banking sector.
Going forward, completing Banking Union is our first task. An important cornerstone, the European deposit insurance system, is still ahead of us. And in order to strengthen the Single Resolution Mechanism's credibility, the Commission considers it very important to quickly move towards a sufficiently large and readily available common backstop.
These measures need to go hand in hand with further measures to reduce risks.
Last November, the Commission put forward a comprehensive reform package to strengthen the resilience of EU banks. By incorporating global standards into EU law, we introduced strong safeguards to protect financial stability and ensure a level playing field for EU banks.
Going forward, the Commission is working towards an agreement to finalise the Basel reforms. Prolonging uncertainties over the new framework is not good for the financial sector. But any agreement will have to maintain sufficient risk sensitivity in the regulatory framework. And it will have to respect certain EU specificities, such as the way in which residential real estate is financed in the EU. Given the sheer number of reforms we have enacted since the crisis, and the greatly improved resilience of our banking sector today, we should avoid further significant increases in capital requirements.
Second, as we work on completing the Banking Union, we can also open up opportunities to create a more favourable supervisory framework for cross-border banking. As part of our Banking Package we have proposed targeted possibilities to extend the use of liquidity and capital waivers. The Commission is aware of remaining concerns of Member States hosting banks from other Member States. Let me therefore underline that our proposals include significant safeguards to ensure financial stability is protected in these Member States.
Finally, in today's report we are considering how to make targeted improvements to the existing macro-prudential framework. We would like to reinforce the ESRB, by giving it an even stronger coordination role and keeping it broad and inclusive. At the same time, we are not planning any new legislative proposal on the macroprudential toolbox which national authorities have at their disposal to intervene.
While working to complete the Banking Union, the Commission is also moving ahead at full speed to deepen and integrate European capital markets. This brings me to my second area of reflection today, on completing the Capital Markets Union.
Today's report shows that EU capital markets are growing. Private equity and venture capital funds raised 37 percent more capital in 2016 compared to 2015. The issuance of corporate bonds, in particular euro-denominated ones, continues to expand. Alternatives such as business angels and crowd funding are also performing well in certain Member States.
To support this, over the past 18 months, we have already delivered more than half (19/33) of the measures announced in our blueprint, the Capital Markets Union Action Plan.
We agreed on the simplification of prospectuses, and we are getting closer to an agreement on legislative actions to further boost our venture capital framework, and to restart securitisation markets, which could unlock up to €150 billion of additional capital.
Despite these encouraging results, we cannot be complacent. More remains to be done to break down barriers to investing in other EU countries, and give European businesses - small and large - access to the capital they need to innovate and create jobs.
Amongst the EU27, there is a strong sense of commitment to developing a Capital Markets Union.
In a few weeks, the Commission will release its Mid-term review of the CMU Action Plan. It will provide an expanded list of actions that significantly raise our ambitions for integrating EU capital markets.
We have received more than 200 replies to our public consultation on the European Supervisory Authorities. The current supervisory framework represents a critical element for well-functioning and integrated financial markets, and CMU in particular. The success of the consultation gives us a solid basis for proposals to further increase its effectiveness.
We are developing a comprehensive strategy on financial technology, to foster innovation while ensuring a level playing field. It is important to find this balance for example for the Payment Services Directive. We will therefore ask the European Banking Authority to have another look at the draft standards for data interfaces, and at proposals to allow fintechs access to the customer facing interface, whenever the dedicated interface breaks down or is not performing properly. This would safeguard the continuity of access for fintechs, while still allowing banks to require fintechs to use dedicated interfaces in normal conditions.
And we will propose further steps to remove remaining barriers to cross-border investment, improve access to risk finance for SMEs, and create a more effective and rewarding retail investor engagement with capital markets. Our objective is to have the CMU building blocks for a lasting impact in place by 2019.
One thing is however clear: the Commission can provide the building blocks, but it cannot build CMU alone. Its success will depend on political commitment from Member States, the European Parliament and market participants.
Ladies and Gentlemen,
The ongoing economic recovery gives us an opportunity to strengthen our position.
Now is the time to build a resilient financial system that can weather global uncertainty and future challenges.
Now is the time to complete what we started, step up our work on financial stability and financial integration, and complete Banking Union and Capital Markets Union.
This is the only way forward for Europe's financial sector.
Thank you for your attention.