12 November 2014

グラハム・ビショップ：欧州委員会ジョナサン・ヒル委員（金融安定・金融サービス・資本市場同盟担当）は資本市場同盟に向けて発行者ではなく投資家にフォーカスするべき

Commissioner Hill’s telescope should be pointed firmly towards a vision of a massive expansion of the provision of market finance for the European economy directly from its citizens. If the demand is there, all manner of bonds will be issued to meet it without any need for regulatory artifices to encourage individual financial products. A massive expansion of Other Financial Intermediaries (OFIs) is the answer to the puzzle of stimulating non-banks to finance European economic growth, rather than expecting super-safe banks to take new risks.

The European Union – at the full 28 Members rather than just the eurozone – is now gearing up to complement banking union with a `capital market union’ (CMU). In reality, this amounts to no more than completing the `single market’ programme that commenced in earnest in 1992. But catch-phrases do matter – they catch the spirit of the moment and focus attention on to a manageable list of prioritised actions.

President Juncker has made CMU a priority of his term and gave the explicit responsibility to UK Commissioner Hill. Unsurprisingly, the first speech of his term was on……. “Capital Markets Union – finance serving the economy”. The speech seems to have stimulated an amount of Press commentary and analysis, but I have an increasing feeling that policy-makers may be looking down the wrong end of the telescope in the framing of this policy.

At this very early stage of policy development, it is worth dissecting Hill’s speech to discern the framework that is being used:

• Review the work already done to check that total financial safety – the watchwords from the G20 meetings from 2008 onwards – does not lead to that memorable George Osborne phrase “the economic stability of the graveyard”.


• Identify regulatory gaps: there surely are some


• Look at the cumulative effects of all the policies: essential as it may already be the case that the banking system is overloaded. BUT the solution may be to encourage non-banks to be financial intermediaries rather than make the banks unsafe again.


• Finish off the implementation of existing legislation: “with over 400 delegated and implementing acts yet to be adopted” there must be a real risk of losing sight of the vison of CMU amidst the welter of special interest lobbying on the fine details where the Devil is well known to lurk.


• Bring the benefits of the single market in financial services to consumers: getting to the heart of the matter now as consumers = voters! So the voters must come to realise that it is “Europe” that brings them tangible benefits in their daily lives. Above all, Europe must not bring them a financial catastrophe – that would be the political end of `Europe’.


• Open consultation with anyone – in the 28 States - who has views. Excellent idea BUT the lobbyists of the special interest groups will flood him with ideas to benefit them whilst having some tangential social gains for the economy as a whole.  However, the 500 million consumers will be almost totally silent – the problem faced by reforming Commissioners for decades. However, a good proxy for the consumers of Europe should be the European Parliament – as their elected representatives.


• The risks of this regulatory capture are epitomised by the Commissioner’s list of immediate challenges: European Long Term Investment Funds (ELTIFs), high-quality securitisation and covered bonds. This is simply a list of products that the financial services industry wants to produce and sell to someone.


• Timescale: action plan by mid-2015 but long term project.


• He concluded with a list of eminently worthy aspirations.

Graham Bishop analysis

This approach risks creating a capital market union designed by (and for) the issuers. If there are insufficient buyers of these securities, it will surely fail to meet the over-arching vision of a capital market union. Indeed, Europe will then relapse back into a bank-financed system with all the economic sclerosis that will be the inevitable hall-mark of a super-safe banking system.

If Commissioner Hill looks through the right end of his telescope and trains it on the longer term horizon, what vision would be see? Then he could chart a course that lines up the shorter term objectives as way-points to reach the vision, minimising the risk of being wrecked on shoals of tiny (though essential) details on the way. My personal vison is set out below.

In his written responses to ECON for his Hearings, Commissioner Hill covered the spirit of this definition: “encourages the free flow of capital to where it is most needed”. But is the rush of everyday detail already crowding it out? If the vision is lost, then there may not be sufficient determination to see through some of the most difficult reforms needed “such as in company, securities and insolvency laws, and tackle barriers in other cross-cutting areas such as taxation...”

From my work over the past decade or more in these fields, I am extremely aware of why these problems persist. Far from being the `low-hanging fruit’ that politicians always seek first, these are amongst the most intractable issues. The message of the crisis is that the time must now be ripe to pluck even these most difficult fruits.

If policy-makers truly want to reduce Europe’s dependency on the banking system, then the steps to ease the route for specific products are necessary, but are still a long way from being sufficient. Buyers of the securities must recognise their own economic needs and seek securities that meet them. Issuers will certainly flock to supply what buyers want! So the challenge to Commissioner Hill is far more profound than tinkering with securitisation rules. 

How is this happy confluence of issuers and buyers to be arranged?

It is now a commonplace to quote the example of the US – as did Commissioner Hill “A couple of figures make the point. Mid-sized companies in the US have roughly five times as much funding from capital markets as their counterparts in the EU. EU businesses get about 80% of their financing from banks, and 20% from debt securities. In the US, depending on which set of statistics you are reading, or which statisticians you are talking to, the ratios are broadly speaking the other way round.”

However, the solution cannot be to attempt to pump out a vast quantity of new debt securities/bonds and hope for the best. There are some striking differences between the US and EU in the fundamental structure of their financial systems. Bond-buying is the symptom, not the illness itself.

The FSB has just published its Global Shadow Banking Monitoring Report for this year and it contains some fascinating data about the relative size of institutional sectors. However, it comes with numerous caveats about the definition of what is within MUNFI - the Monitoring Universe of Non-Bank Financial Intermediation. Chief amongst these is that it hardly includes hedge funds as – overwhelmingly - they are registered outside the jurisdictions of the FSB. This year, FSB has attempted to present a narrower universe that excludes entities that are already consolidated within the banking sector of the purpose of prudential regulation. Nonetheless, some observations:

1. The US has very substantial Public Financial Institutions (PFIs) that are absent in Europe. The category includes Fannie Mae, Freddie Macand Federal Home Loan Banksin the US. Surprisingly, EIB, KFW etc are not included in the euro area – perhaps because they are formally regulated as banks. (This is NOT a plea to set up corresponding institutions in the euro area to create a vast new quantity of `off-balance sheet’ public debt. There is more than ample public debt already)

2. The most striking feature is the sharp decline in the share of banks within the euro area– by around a fifth since the onset of the crisis. The FSB has just proposed further major increases in the level of Total Loss Absorbing Capital (TLAC) for systemically significant banks (which account for the majority of euro area bank assets). So this trend decline can be expected to continue.

3. Insurance and pension funds in the euro area are perhaps half the scale of those in the US. Accounting rules now make `Defined Benefit’ pension funds quite unattractive to their sponsoring firms so any growth is likely to be in the `Defined Contribution’ sector which will often lead to an investment in UCITS - normally part of the `Other Financial Intermediaries’ (OFI) sector. The key is that the citizens will take the investment risk themselves. However, this category should not be made the bedrock of Capital Market Union if Europe wants to reduce its economic dependency on financial institutions that are subject to asset-liability matching rules (so are inherently, and often viciously, pro-cyclical).

4. A massive expansion of OFIs is the answer to the puzzle. The citizens would then take the market risk but they would correspondingly gain the reward of collecting their share of the profits that would otherwise be reaped by super-safe banks remunerating the capital that makes them so safe. However, citizen-investors must understand these risks before being encouraged to take them.  There must always be a residual safe asset for those citizens who wish to give up risk/reward in exchange for certainty – at least in nominal terms. That requirement points to the need for 'eurobills' such as I have advocated for several years.

So Commissioner Hill’s telescope should be pointed firmly towards a vision of a massive expansion of the provision of market finance for the European economy directly from its citizens. If the demand is there, all manner of bonds will be issued to meet it without any need for regulatory artifices to encourageindividual financial products. 

© Graham Bishop