When the UK voted to leave the EU in June 2016, observers feared that it was the end of the bloc’s main financial project — the plan for a Capital Markets Union (CMU) between 28 national markets. Lord Hill, the British commissioner driving the project, resigned the day following the Brexit vote.
But the Commission is still moving forwards on the project — indeed, moving forward with more vigour than ever, saying that Brexit “reinforces the urgent need to further strengthen and integrate the EU capital market framework”.
The EU executive has unveiled new streams of work in the area such as green finance and fintech. It is now getting ready for the next steps in these fields, EU Commission vice-president Valdis Dombrovskis tells GlobalMarkets.
“The EU should lead the way in green finance,” says Dombrovskis. “There are estimations that limiting global warming to 2°C will require €180bn of annual investment for the next two decades — and that cannot rely only on private finance.”
Possible actions the Commission is assessing include disclosing green criteria in fiduciary duties, setting up an EU label and working on a green “supporting factor” — a cut in capital requirements for green bonds.
One of the pivotal moments in the Commission’s sustainability work will be the publication of a high level experts’ report, expected by the end of the year.
On fintech, the debate in the EU is less advanced. EU finance ministers held a first general debate on the subject in mid-September and the EU Commission is preparing an action plan set to be unveiled early in 2018.
“Is there scope for EU action? How can we make EU enabling legislation? And why are fintechs scaling up more successfully in the US?” asks Dombrovskis. “One of the answers is that we have different treatments and different regulatory regimes… we need to use the full scale of the EU single market.”
New CMU priorities also include concerted work at the EU level on the reduction of the €1tr of non-performing loans. An action plan was agreed in early July laying out a list of tasks for the EU Commission and other EU supervisory bodies.
“We are working on it but we are still in the relatively early stages,” says Dombrovskis.
The Commission is working on a European blueprint dedicated to setting up national asset management companies to buy non-performing loans from banks. Markets are also expecting the result of a study commissioned from BlackRock that will compare the efficiency of the loan enforcement framework in each country.
But the Commission can’t create a capital markets union by itself as Dombrovskis likes to put it. In the EU law-making system its role is limited to the proposal of draft legal texts, which must then be amended and adopted by the member states and the EU Parliament.
Observers remain critical, pointing to the very slow progress of Parliament and member states on some of the most important financial regulation files. For example, a large package of banking rules unveiled last year is still pending, with member states arguing on a number of technical points. Estonia, which chairs the Ecofin meetings between member states, aims to have an agreement on the package by the end of the year but sources tell GlobalMarkets that it won’t be easy.
However, Dombrovskis thinks it is on track, pointing to a recent decision to fast track the most urgent parts of the document, which concern the new IFRS 9 accounting standards and loss-absorbing bail-in bonds for banks.
A recent proposal to strengthen oversight of ‘third country’ clearing houses is also proving a challenge to get through EU member states, with negotiation documents obtained by GlobalMarkets showing strong divergences. France and Germany are pushing for stronger control and veto rights whereas other states are more sceptical.
“There was quite a mixed welcome; views are quite divergent,” acknowledges Dombrovskis.
The Commission’s proposed solution sets up a new structure inside the European Securities and Markets Authority to oversee third countries, CCPs dealing with large amounts of euro denominated transactions. But there could be additional requirements including relocation obligations for these entities. Relocation of CCPs is “not an end in itself”, stresses Dombrovskis, describing his text as a “balanced proposal”.
He is less optimistic about the draft euro-area deposit guarantee scheme. Dombrovskis unveiled this proposal back in November 2015, and progress has been extremely limited since then. The scheme is proving extremely controversial for member states in northern Europe, who worry about their banks paying for bank failures in southern Europe. Neither Parliament nor member states have reached an agreement though lots of technical work has been done in the last two years.
“We see relatively slow progress,” concedes Dombrovskis, adding that he is planning to try to break the deadlock in early October when he will officially come out with a “package” on this issue. Details on the package are still unclear but insiders expect a non-binding communication encouraging the co-legislators to move forward on the deposit insurance scheme. “We are looking for ways to facilitate compromises,” says Dombrovskis.
Banking structural reform
The European Commission has another power: it can withdraw any file of work if it believes an agreement can’t be reached. Insiders are speculating over whether the Commission could pull the plug on the Banking Structural Reform initiative.
This proposal, unveiled in 2014 by Commissioner Michel Barnier, was sharply criticised by the bankers and lobbyists. It imposes a separation of deposit and investment banking for European banks and forbids proprietary trading.
But the file has not moved forward for more than a year as left-wing and right-wing MEPs are divided — some praising the proposal and others opposing the initial draft.
When he took over as the commissioner covering banking regulation in June 2016, Dombrovskis signalled his intention to
unblock the initiative. A meeting with Parliament’s co-ordinators in October 2016 nevertheless proved inconclusive. “Progress on this file is blocked; we didn’t see any real momentum,” Dombrovskis tells GlobalMarkets.
But he refused to say whether he would withdraw the file. “Work on risk reduction has not stopped,” says Dombrovskis, pointing to existing work on cutting risk in the banking sector. But he declined to give his views on whether the banking structural reform proposals are needed to ensure a stable and integrated financial system.