January 09, 2020 / 04:19AM / By Luis de Guindos /
Header Image Credit: Financial
Being a speech By Luis de Guindos, Vice-President of the
ECB, at the SUERF/De Nederlandsche Bank Conference "Forging
A New Future Between the UK And The EU" on Wednesday, January 08, 2020.
It is my pleasure to deliver
the keynote speech at this year's SUERF/DNB conference.
The title of this conference is
very apt. Brexit will certainly require a new future to be forged between the
United Kingdom and the EU. The United Kingdom's departure has important
implications for the EU financial system, most notably for capital markets. So
we need to give serious thought to optimally shaping the future relationship
between our financial sectors in the awareness that London, though likely to
remain an important global financial centre, will become less integrated with
EU markets and firms. We will also need to step up our efforts to further
develop the EU's domestic capacity in capital market activities, so as to avoid
a Brexit-induced increase in financial fragmentation, while at the same time
ensuring that the United Kingdom and EU Member States do not engage in a race
to the bottom on regulation.
Taking up the theme of the
conference, I would first like to focus on how to forge a new future between the
United Kingdom and the EU with regard to some key financial activities. I will
then turn to the much-needed drive to strengthen the European financial system
by completing the capital markets union and banking union.
pre-eminence in certain key financial market segments
For decades, Europe's leading
financial centre has been the City of London and, in some notable areas, the
EU's financial ecosystem has relied heavily on services provided by UK-based
banks and market infrastructures.
Derivatives clearing - a
critical segment of financial markets - is a striking example. As of December
2019, almost 90% of all over-the-counter (OTC) derivatives positions taken by
euro area institutions were cleared at UK global clearing houses.
Derivatives clearing is not the
only example, however. Large investment banks operating from London play a
significant role in euro area bilateral OTC derivatives markets. In August last
year, over a quarter of uncleared OTC derivatives held by euro area institutions
were sourced from the United Kingdom. While the activities of these investment
banks were considered unlikely to create financial stability risks in a hard
Brexit scenario (also thanks to the temporary measures taken by EU and national
authorities), they are still relevant to the provision of liquidity to euro
area markets over the longer term. UK-based
investment banks are also key providers of advisory and financing services
related to securities issuance, M&A activity and syndicated lending to euro
area clients. They play an active role in debt and equity issuance for euro
area non-financial corporations, including book running and underwriting
services. Between 2012 and 2018, almost half of all debt and equity issuance
for euro area non-financial corporations was carried out by global banks
serving our market from London. Our reliance on London also stems from the fact
that, in some cases, the City represents a gateway to global financial markets
for euro area financial and non-financial firms, allowing them to tap into
global capital and liquidity pools. In other areas, however, reliance on London
is quite limited. For instance, UK-domiciled banks play a marginal role in
direct lending to euro area households and non-financial companies.
Had it not been for Brexit,
certain global and regional trends might even have led to an increase in the
EU's reliance on the City of London as a centre for market-based finance.
Indeed, the balance between banks and non-bank financial institutions in the EU
has been evolving in recent years: although still very much bank-based, our
economy is increasingly financed by non-bank institutions. In the euro area,
total assets held by non-banks have almost doubled over the last ten years,
growing from â‚¬23 trillion in 2008 to â‚¬45 trillion in June 2019. Non-banks
currently account for around 55% of the euro area financial sector. Their fast
growth reflects their expanding role in financing the euro area real economy.
Whereas in 2008 non-banks accounted for 14% of the euro area financial sector's
loans to non-financial corporations, that share roughly doubled in a decade.
Non-banks provide a steady net flow of financing to non-financial corporations
through the purchase of debt securities.
decisions and economic drivers will affect the status quo
These examples give a sense of
the level of integration between UK and continental financial markets, in
particular for certain complex and sophisticated financial services linked to
derivatives markets and investment banking activities. However, Brexit will
change this status quo and a degree of decoupling is likely.
It is difficult to make firm
predictions about the extent to which our two financial systems may drift apart
or remain integrated. The contours of the future EU-UK relationship in
financial services are still uncertain, and the economic drivers and regulatory
choices which could reshape this relationship will probably only be felt over
time. The EU will need to balance the benefits of continued integration with
the UK financial system against potential risks to financial stability,
consumer and investor protection, the level playing field and the integrity of
the Single Market. As I have said in the past, this path will not be easy for
either side of the Channel, and the risks linked to regulatory divergence and a
potential race to the bottom should not be taken lightly.
Allow me to briefly discuss the
regulatory dimension of this question. A possible scenario is that the United
Kingdom will not seek to remain a member of the EU Single Market once it leaves
the EU. This means moving away from a fully-integrated relationship underpinned
by the EU's single rulebook and single passport for financial services, and
relying instead on the EU's equivalence framework for third countries. For some
types of financial activities, this framework allows financial service
providers from third countries to continue to serve EU clients provided a
number of strict conditions are met.
For example, in the area of central
clearing - which I touched upon earlier - cross-border market access is
widespread: 15 jurisdictions are considered equivalent by the EU and 33
third-country central counterparties (CCPs) are recognised by the European
Securities and Markets Authority (ESMA). At the same time, given the euro
area's reliance on UK CCPs, strong safeguards must be put in place to preserve
financial stability and a level playing field. In this respect, I am very
pleased that EU legislators have adopted a new supervisory framework for CCPs
in the European Market Infrastructure Regulation (EMIR 2). This framework
requires third-country CCPs which are critical for the EU to meet EU prudential
requirements under ESMA's supervision, with the involvement of the relevant EU
central banks. If UK CCPs are to continue to provide euro clearing services on
a systemic scale under the equivalence framework, they should be subject to the
rigorous application of these safeguards.
In central clearing or other
areas such as trading or listing, the extent of continued market access will
depend on whether or not a decision is taken to grant equivalence to the United
Kingdom. These decisions are beyond the purview of the ECB, and it is not my
place to comment on them. Suffice to say that there is no automatic right to
For other types of financial
activities, no specific regime for accessing EU markets has been established.
This is not unusual: most if not all countries place some restrictions on the
types of financial services that can be provided across their borders. There
may be good reasons for these restrictions, such as consumer protection or
financial stability considerations. In the case of the EU, certain bank lending
and deposit-taking activities are not covered by the so-called third-country
regimes and so will no longer be able to be provided from the United Kingdom,
but will need to be provided from within the EU. This - together with the fact
that equivalence cannot be taken for granted - is why many banks have chosen to
relocate activities to the EU27, and have been engaged in very detailed
discussions with the ECB and other authorities to obtain agreement on their
plans. The ECB expects banks to build up their capabilities in EU27 countries
and to implement the agreed relocation plans within the previously agreed
risks of financial fragmentation
Regulatory drivers - and in
particular the end of passporting rights for certain UK-based activities - are
already having an effect on the geography of financial centres in the euro
area. According to preliminary evidence, a small number of financial hubs
appear to be emerging as a result of the relocation - or plans for relocation - of certain activities. Most incoming banks have indicated Germany, Ireland, the
Netherlands or France as their new main location in the euro area.
This pattern also seems to
apply to the relocation of activities beyond banking. Public statements and
market intelligence suggest that a sizeable fraction of asset management firms
and insurance companies that are relocating activities from the United Kingdom
as a result of Brexit have moved to either Ireland or Luxembourg. And speaking
here in Amsterdam, I should note that the Netherlands is attracting a
substantial amount of trading platforms, exchanges and fintech companies.
The persistence of such
dynamics, and the emergence of a clearly multi-centric euro area financial
system, could raise a number of challenges. In particular, without further
progress on banking and capital markets union, a more fragmented financial
structure could affect the ability of investors and companies from a country
experiencing a negative shock to access investment and funding opportunities in
unaffected countries (private risk-sharing). It could also create regulatory
and supervisory challenges: domestic capital markets within the EU are
currently subject to national rules and supervision; the differences in regimes
could further inhibit the integration of markets and perhaps incentivise
and the need for renewed momentum on the capital markets union and banking union
Indeed, from a global
standpoint, European capital markets are too small and fragmented. The goal of
the capital markets union (or CMU) is to develop an ecosystem that will allow
the development of strong European financial markets and intermediaries which
are able to compete internationally. This requires designing policies to
support the development of markets' size and scope, removing barriers between
EU capital markets, expanding sources of funding for companies, and broadening
the role of the non-bank financial sector. Ultimately, a well-developed CMU
will increase private risk-sharing, promote financial stability and boost
Starting in 2015, the European
Commission launched a series of initiatives to stimulate the development and
integration of EU capital markets. On market development, the Commission
adopted a set of harmonised rules on securitisation and published its fintech
action plan in 2018. Initiatives on market integration included the review of
the European Supervisory Agencies and the covered bond legislative package. The
former aimed to make our system of financial supervision more efficient and
effective and also gave the European Banking Authority a coordinating role in
the areas of anti-money laundering and terrorist financing. The latter should
foster the development of covered bonds by creating a harmonised EU framework,
providing a source of long-term financing for banks and supporting the real
economy across the EU.
Despite the efforts of
policymakers and market participants, retail investors are far from having
embraced investing in capital markets. While the full impact on the real
economy may take time to materialise, it is concerning that the initial
ambitions of the plan launched by the European Commission towards the
development of a CMU were significantly lowered to enable co-legislators to
reach an agreement.
So there is still much to be
done on the CMU project and Brexit makes these issues even more pressing. Let
me highlight a few initiatives. First, the European Commission signalled that
it would make CMU a centrepiece of the forthcoming legislative agenda and has
already set up a high-level forum, composed of experts from different industry
sectors, which has started work on proposals for the next CMU Action Plan. Second,
a high-level working group created by Germany, the Netherlands and France
published a proposal to relaunch CMU in 2019. This
proposal includes recommendations for generating long-term savings
opportunities, developing equity markets, enhancing cross-border financial
flows, and developing debt, credit and foreign exchange financing tools with a
view to increasing the international role of the euro. Last but not least,
there have been industry-led initiatives such as the CEPS-ECMI task force on
rebranding CMU, which put forward a market finance action plan.
These initiatives provide
valuable input for the CMU agenda. Looking ahead, I see two areas where
progress is particularly needed.
First, capital markets remain
subject to national rules and supervision. This hampers the cross-border
provision of services. Further harmonisation, for instance in the area of
insolvency and taxation regimes, is needed to foster integration in the euro
Second, if the EU27 financial
markets deepen, diversify and expand across borders, there would be a clear
flipside: these developments would need to be accompanied by sufficient
oversight and regulatory tools to avoid regulatory arbitrage or the build-up of
risks in certain parts of the system. In particular, ensuring the resilience of
individual institutions is not enough to guarantee the stability of the system
as a whole: a macroprudential framework for non-bank financial institutions is
necessary for identifying and addressing risks at the system level.
The links between the capital
markets union and the banking union
Revitalising the CMU agenda
will also bring benefits for the completion of the banking union, as banks and
markets complement each other in financing the real economy. We
need to ensure that this reinforcing loop is strengthened over the coming
years. I would like to highlight three key priorities for the banking union.
First, it is important to
operationalise a credible common backstop to the Single Resolution Fund to
provide additional confidence in the bank resolution framework. The policy work
on this backstop is at a very advanced stage.
Second, in order to close
potential liquidity gaps that may still hinder efficient resolution, the
outstanding issue of liquidity in resolution needs to be addressed. Progress is
needed in the discussions on potential solutions in order to place the banking
union on a par with other major jurisdictions, like the United States and the
Third, it is crucial to
establish a European deposit insurance scheme (or EDIS) to provide uniform
protection to depositors within the banking union, regardless of their bank's
location, and to help reduce the sovereign-bank nexus. More efforts are still needed
in this regard. Hopefully 2020 will be the year in which the political deadlock
on EDIS will be resolved and a clear roadmap adopted, reflecting timelines and
conditions for the various stages of EDIS.
Let me conclude. Today I have
explained why Brexit underscores the need to renew our ambition on CMU and
complete the work on banking union. The unifying theme of the priorities that I
have outlined today is basically risk-taking and risk-sharing among private
agents. In a nutshell, both the capital markets union and the banking union
provide a framework that encourages innovation and integration. Further work on
these agendas will enhance the attractiveness of the EU capital markets on the
global stage beyond Brexit.
- See also ECB (2019), Financial
Stability Review, May.
- See European Commission (2019), Press release on High-Level Forum on capital markets
union, 10 October.
- See The Next CMU
High-Level Group (2019), Savings
and Sustainable Investment Union, October.
- See CEPS and ECMI
Capital Markets Union.
- See Pires, F. (2019), Non-banks
in the EU: ensuring a smooth transition to a Capital Markets Union, SUERF Policy Note, No 103.
- See ConstÃ¢ncio, V. (2017), "Synergies between banking union and capital markets
union", speech at the joint conference of the European Commission and
European Central Bank on European Financial Integration, Brussels,19 May.
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