Brussels, 25/03/2013 (Agence Europe) - The European Commission is running a consultation exercise until Wednesday 12 June 2013 on how to promote long-term investment by diversifying sources of finance which, in Europe, are closely dependent at present on the banks. The public consultation is based on a Green Paper unveiled on Monday 25 March and will help the Commission draw up proposals and draft legislation, where appropriate.
Banks in Europe finance up to three-quarters of the economy, but are reining in their finances in order to comply with the new EU bank capital requirements that force them to have greater reserves of capital and cash. Countries traditionally finance much infrastructure investment, but they, too, are tightening their belts, which is why the Commission wants to get other institutional investors, like insurance companies, pension funds, unit trusts and so on, to chip in because they use a longer-term business model that suits long-term investment.
EU Internal Market Commissioner Michel Barnier says that insurance companies and pension funds have an important role to play and wonders how they can be encouraged to invest in the real economy and what the right regulations would be to this end. He points out that European insurance companies manage assets equivalent to the EU27 annual GDP. The updating of the EU directive on professional pensions institutions (PPI) aims to boost protection for affiliates and pension funds' cross-border business and will take account of the potential impact on long-term financing of the economy. The Commission will be unveiling a full report on how long-term investment funds (LTIF) might invest in the real economy and thus help institutional investors to diversify their portfolios and share risks.
Hailing the Commission's Green Paper, European insurance companies warn against any regulatory changes that would restrict their ability to finance long-term investment. For example, they want to make sure that the capital requirements laid down in the Solvency II directive do not increase the cost of long-term investment, says Insurance Europe.
The role of national and regional development banks is stressed because they attract private investment and make investment costs more predictable.
The question of how the financial markets should operate in order to boost long-term investment is being asked by the Commission, along with how to reduce fragmentation of national securities markets while taking account of concerns about asset encumbrance, how to encourage securitisation markets through greater supervision and transparency and how to encourage greater use of project bonds. The Commission wants to know whether the “own capital financing deficit” (lack of debt-funded financing) is damaging to long-term investment.
The third prong of the consultation is the regualtory environment. Some member states have taken measures to encourage long-term saving and encourage ordinary people to invest in unit trusts and the like that count towards their pension, special bank accounts (Livret A in France, libretti postali in Italy and Bausparvertrag in Germany) that provide fixed interest rates guaranteed by the state for the savings, which are invested in hospitals, social housing and unversities. Would the introduction of special EU systems encourage greater long-term investment?
In terms of tax, it makes sense to get into debt, explains Barnier, because in most countries, loan repayments (mortgages and the like) are tax-deductible but interest on savings is not. The Commission says it might be useful to design company tax so that it is tax-neutral in terms of the method of finance. It is asking stakeholders about accounting rules (use of “true value”), corporate governance and information requirements.
Small business. There is a complete section of the consultation exercise on the finance needs of small business (small and medium-sized companies). The Commission lists a series of measures that could be of help to small business for accessing finance, such as the development of special markets and networks using special accounting rules for small businesses; setting up new securitisation mechanisms (the COSME programme) and drawing up rules for credit rating; encouraging innovative investment, like leasing and participatory finance. Barnier said he wanted to create an EU environment for crowd funding. (MB/transl.fl)