06 February 2020

Sabine Mauderer: Brexit - a push for market integration

Keynote speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, in which she refers to Brexit as a catalyst for the EU capital market, saying that strengthening the EU's market infrastructures will help Europe become a powerhouse in the global financial system.

Since EU and UK financial markets are so deeply intertwined, many market participants hope that the EU and the UK will find a bilateral regulatory post-Brexit arrangement. A modus vivendi that guarantees the current access to UK clearing houses at acceptable conditions in the future. Hoping for regulatory post-Brexit arrangements is one thing. Developing EU-based industry alternatives is another.

A well-known alternative is Eurex Clearing's Partnership Program.  However, market concentration is still high. For example, about 85% of euro-denominated OTC interest rate swaps are cleared at LCH Ltd. in London. In the face of market concentration and relatively slow-moving market practices, it is quite obvious that developing a complete supply chain in the EU may take some time. For regulators and the Bundesbank as part of the Eurosystem, financial stability remains our paramount concern in the discussion on CCPs. We have to be vigilant with regard to concentration risks.

Apart from their systemic importance, resilient CCPs also matter for the smooth functioning of payment systems and effective conduct of monetary policy. In its role as the central bank of issue for the euro, the Eurosystem needs to effectively oversee euro-denominated clearing activities, no matter where they are established.

So what I will do next is focus on the integration of the EU's capital markets.

The key questions are:

First, what opportunities do integrated capital markets have to offer? And:

Second, how can the EU press ahead with market integration? 

The first question - about the opportunities offered by integrated, and thus deeper, capital markets - can be answered in a number of ways. Allow me to touch upon three of them. The first, and most important, is: capital markets can boost growth potential.  They channel savings to where the greatest benefits are expected: to the best ideas and firms. If we use the size of capital markets as a rough measure of how they power the economy, Europe has a vast amount of untapped potential.  At any rate, the differences compared to the financial markets in the United States are considerable.

Second, integrated EU markets are becoming increasingly important in a changed global setting. If others cut themselves off, it is crucial for Europe to bundle its power. This is the only way to gain resilience and become less dependent on financial flows from third countries. At the end of the day, it is about funding the major projects for the future of the EU. It is about successfully transitioning to an innovative digital and climate-neutral economy!

Third, speaking as a Eurosystem central banker, I support integrated markets from a monetary policy perspective as well.

My first point - broader capital market access for SMEs - builds on the lessons learned from the past decade. In the euro area, the sovereign debt crisis mainly affected banks in Member States regarded as less creditworthy.  As a result, some areas lacked financial support when they needed it most. Small businesses with no access to capital markets were hit especially hard by banks' restraint. Much has happened since then. For example, we have introduced a countercyclical capital buffer to boost resilience in Europe's banking sector.  At the same time, it's always a good idea to have a broad range of funding options to choose from.  Capital market solutions can pick up where bank-based funding leaves off. It's the start-ups I'm mainly talking about here. This is where the benefits of venture capital are particularly evident.

With regard to European market integration, there are four points we need to bear in mind.

First, integrated markets can tap into the growth potential of the financial sector and real economy more effectively; 

Second, market integration can help ensure greater financial independence;

Third, market integration can enhance financial stability, particularly in the euro area.

And fourth, we need progress in terms of market access for SMEs and capital market culture in old-age provision.

With regard to Brexit, strengthening our own market infrastructures - the lifelines of the EU capital market - will help Europe become a powerhouse in the global financial system.

Full speech

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