Banking, financial sector groups lay capital markets priorities for next EU mandate

A group of banking and financial sector firms urged the next European Commission and Parliament legislators to introduce measures to boost supply and demand for market assets, helping the bloc’s economy compete with the US.

A report published by the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA) and the Federation of European Securities Exchanges (FESE) called for deepening the bloc’s single market for capital as a vital route to leverage trillions of euros in private investments and boost the bloc’s lagging competitiveness.

The lobby groups’ report notes that “European capital markets are losing their competitiveness, particularly when compared to the United States.”

“This threatens to hold Europe back, as capital markets are fundamental to finance innovation, deliver the funding needed for the green and digital transformations, and generate the necessary returns to support an ageing population,” it adds.

The report cites figures showing that the size of Europe’s equity markets stood at  66% of its GDP in 2022 – compared to 157% in the US. Their liquidity levels also lagged, dropping from 66% to 52% between 2016 and 2022 – while they held at 145% in the US.

It also warns that while assets available for investment for households, pension funds, and insurance companies) amount to 622% of GDP in the US, “some major European economies lag significantly behind with 200% to 300% of GDP available for investment.”

The report further stressed the broader capital markets (beyond equity markets) in the US are currently far greater and more liquid than in the EU.

“Reaching US levels of investment in capital markets would require an additional €35 trillion of capital in Germany, Italy and Spain alone,” the report notes.

It adds, “To put this into perspective, the equity market capitalisation of the entire European Union was €13 trillion in 2022.”

The report by the three large banking and financial sector associations includes recommendations to shore up the demand side of capital markets: enhancing retail investors’ access to markets, improving financial literacy, reducing barriers to investments across EU countries, and using “tax and regulatory incentives” to encourage pension funds “to invest in the EU’s real economy.”

On the supply side, it urges policymakers to lower requirements for the securitisation market, “foster convergence” of financial supervision, and harmonise insolvency laws across member states.

It also proposes “mandatory competitiveness checks” for all new regulations about the financial services industry.

Aligning with growing policy momentum for market-friendly measures

Many of these proposals — including those relating to financial supervision, securitisation, and insolvency harmonisation — mirror proposals laid out by EU policymakers earlier this year, namely by the Eurogroup in March and the European Council in April.

Therefore, Tuesday’s sector report aligns with a broader EU push to revitalise Europe’s faltering economy by strengthening the Capital Markets Union (CMU).

It also comes just weeks before a much-anticipated report on the bloc’s competitiveness by former Italian finance minister and European Central Bank (ECB) president Mario Draghi, which is similarly expected to stress the key role of the CMU in mobilising private capital to close the bloc’s “investment gap” to meet its energy and digital transition costs.

However, some of the report’s proposals are likely to meet significant resistance among member states, with several previously expressing deep reservations about restructuring insolvency laws.

Conversely, the request to boost supervisory convergence echoes EU leaders’ decision to avoid calling for a system of single EU supervision.

Following the last European Council summit in April, an EU diplomat told Euractiv that “a lot” of countries — including “but not just” smaller member states — expressed major reservations about EU-level financial market supervision and that the Council’s conclusions were subsequently watered down to reflect their concerns.

The European Commission first proposed plans for a more deeply integrated CMU in 2015, but progress has been minimal since then.

A report published in March by the ECB noted that “there are no more low-hanging fruits to pick in” the area of CMU integration. The bank urged fellow EU policymakers to “address the most important and structural challenges” towards deepening the CMU, including in securitisation, supervision, and insolvency rule harmonisation.

[Edited by Alice Taylor]

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