Brussels, 30/09/2015 (Agence Europe) - On Wednesday 30 September, Financial Services Commissioner Jonathan Hill said that introducing capital markets union (CMU) by 2019 is a project favoured by all 28 EU member states.
“I know that CMU may sound abstract. It's not. It's about creating the right conditions for more funding to flow from Europe's savers to Europe's businesses. It is a fallacy to say that it is a project favoured by one member state (the United Kingdom, Ed., which has the biggest financial market). It is a classic single market approach, supported by all member states.” At the Commission, people say that countries whose capital markets are not very developed have a lot to gain from a lifting of intra-EU barriers to non-bank capital, and the differences among the member states about burgeoning capital markets are much greater than differences between Europe and the United States.
Asked what impact a Brexit would have (the UK leaving the EU), Hill said that the negotiation of the UK's role in Europe was a totally separate issue from bringing about a CMU.
Securitisation. Setting out the main short- and medium-term measures in the European Commission's action plan (see EUROPE 11399), the Commissioner unveiled six tangible measures on Wednesday to introduce capital markets union, including draft legislation to revitalise the securitised financial products market.
Securitisation is the bundling into financial securities by banks of their loans (mortgages and retail lending) and then selling them off on the market. Although accused of encouraging the spread of the 2008 subprime mortgage financial crisis, securitisation is a way for banks to shift debt from their balance sheets and ultimately lend more to the real economy.
Hill said action was being taken in a reasonable manner, while avoiding repeating the errors of the past. The Commission hopes that the future European regulation will allow the European securitisation markets to generate larger transaction volumes, as today's rates are €100 billion short of the normal level of before the financial crisis. But the aim is not to ensure that absolutely all transactions meeting the criteria are covered by EU law.
Based on work by the ECB and the Basel Committee and the fact that default rate for securitised products in Europe is lower than that in the United States, the Commission proposes that criteria be laid down in European legislation defining 'simple' securitised products (such as homogeneity of the underlying assets, low credit default risk, transfer of ownership from the issuer of the loan to the issuer of the securitised product) that are “transparent” (requirement that issuer keeps 5% of its lending portfolio, continuous publication of information about the product's structure and the flow of payments within the transaction, continuous publication of information about securitised credit portfolios, clear definition at each stage of the contractual duties for all parties). An expert says that securitised products issuers will have the responsibility of respecting the law, and investors of verifying that the criteria are met.
Securitised products meeting the European criteria will be published in a register that investors may access free-of-charge. The national supervisory body will remove from the register any securitised product not meeting the EU criteria. Issuers infringing the regulation will run the risk of a fine of at least €5 million and 10% of their annual turnover and may be temporarily banned from issuing simple, transparent securitised products.
Easing of capital requirements. Banks issuing simple, transparent securitised products will have reduced capital requirements. An expert said the capital requirements may be reduced by 25% on average compared with riskier securitised products. Changes to prudential bank legislation are the subject of an implementation measure that the European Parliament and council may endorse without changes over the next three months. The insurance industry should benefit from a similar easing of capital requirements for the issuing of simple, transparent, securitised products, but the Commission's special implementation measure can only be negotiated when the Solvency II directive comes into force on 1 January 2016.
The Commission says, however, that the Solvency II directive needs to be changed now to facilitate investment in infrastructure. A new category of assets will be created to allow a 30% reduction in the own capital requirements that insurance companies have to hold to cover the risks related to long-tem investment in infrastructure. This UCM measure will facilitate implementation of the Juncker Plan to attract €315 billion in new investment in the EU over three years.
On Wednesday, Commissioner Hill also expressed the Commission's desire to consult financial players over the utility of action at EU level to encourage venture capital and covered bonds. For venture capital, it will be questioning the validity of rules restricting investment in venture capital funds (EU Regulation 345/2013), such as the characteristics of fund managers and the minimum threshold for each investor, set at €100,000. In the second case, the European institutions will quiz stakeholders about the utility of a pan-European framework for covered bonds based on the existing rules in countries where these markets are the most developed.
The Commissioner initiated the consultation on the accumulated impact of post-2008 financial crisis legislation brought in when his predecessor, Michel Barnier, was at the helm.
Finally, in November, the European Commission will unveil draft legislation revising the prospectus directive that requires non-quoted companies wishing to raise money on the capital markets to publish a prospectus of information. Commissioner Hill said that prospectuses are sometimes hundreds of pages long and cost several thousand euros to produce, and can be real obstacles. (Original version in French by Mathieu Bion)