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Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the American Chamber of Commerce, Munich, 15 July 2015.
Greece - an update
I am of the opinion that at least four things need to be done.
First, any new assistance programme needs to ensure that Greek banks are adequately recapitalised. Estimations suggest a figure of up to €25 billion will be needed. That figure should be our yardstick, but it needs to be underpinned by a rigorous asset quality review. If, contrary to expectations, more capital is needed, there should be scope to top this figure up.
Second, an ample supply of liquidity needs to be safeguarded in case depositors plan to withdraw more cash once the recapitalised banks reopen.
Third, capital controls need to be gradually lifted over an extended period of time.
And fourth, the structure of the Greek banking sector needs to be scrutinised. What I'm getting at is this: are all four of Greece's major banks viable going concerns with a long-term future?
My remark just now about the structure of the banking sector is pertinent, not least, because it was agreed that the Greek government would transpose the European Bank Recovery and Resolution Directive (BRRD) into national law by 22 July. That would create the toolkit needed to resolve banks in an orderly fashion, first and foremost the bail-in instrument. I believe that this instrument needs to be made available in Greece as swiftly as possible - that is, ahead of the mandatory introduction date of 1 January 2016. Looking at the structure of Greece's banking sector, the question is whether it is possible to consolidate the country's banks without seriously distorting the competitive environment. This is a question that needs to be answered without delay.
To sum up - time is of the essence, especially so for Greece's banks. Everyone should be aware that Monday's basic agreement marks the start of the real work. Now it is up to all the parties concerned to do their jobs to make sure that five months of negotiations weren't in vain - and the focal point here, for me, is the Greek banking sector.
After all, it's not just Greece we're talking about here but the euro area as a whole. And many seem to believe that the crisis in and over Greece has cast doubts over the very process of European integration. But I do not share that view. The proper response, in my view, is not less, but more, integration. And we took a major step towards deeper integration by launching the European banking union.
But we need to look beyond the banking sector and train our sights on the capital markets as well. Extending and integrating the capital markets can also contribute to shoring up the foundations underpinning monetary union. After all, a common currency needs integrated financial markets to thrive.
This idea of a capital markets union has increasingly taken shape in recent months. Back in February, the European Commission presented a green paper outlining a framework for a European capital markets union. The Bundesbank sees the capital markets union as a sensible project that is conducive to deepening European financial integration further still - not only in the euro area but across the European Union.
3. Diversification - strengthening the capital markets
The European capital markets unionessentially sets out to achieve two goals. First, to strengthen the role played by the capital markets in funding the real economy. Second, to deepen capital market integration across national borders.
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The idea behind the European capital markets union is not to give up on bank-based financing, but to harness capital market financing as an add-on. And Europe still offers plenty of potential in this respect. Measured in terms of economic output, the US equity market is more than one-and-a-half times the size of its European counterpart, while the US venture capital market is five times the size of that in Europe, and the US securitisation market is larger still than the European market.
It ultimately all comes down to the old economic adage that you shouldn't put all your eggs in one basket. Or, to couch it in rather more technical terms, it's all about diversifying the sources of corporate financing. If we give the capital markets a more prominent role in funding the real economy, that will give businesses broader and better access to funding - to the notable benefit of small and medium-sized enterprises. What it will also do is create a more efficient financial system that can better support sustained economic growth.
4. Integration - establishing a single capital market
The second objective of the European capital markets union is to deepen the integration of the capital markets. What benefits do integrated capital markets have to offer? One of the biggest advantages, undoubtedly, is that they can help to improve risk sharing. The underlying technical question is this: to what degree does an economic shock impair private consumption?
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In summary, then, a capital markets union offers two takeaways. First, strengthening the role of the capital markets as a source of funding for the real economy can promote economic growth. Second, integrating the capital markets more deeply across national borders can improve risk sharing. The bottom line is that the European capital markets union is a worthwhile project.
5. Turning the idea into reality
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The goal of boosting the role played by capital market financing can be best achieved, in my view, by placing the spotlight on the equity capital markets. That's because equity capital is a form of capital market financing that is particularly effective at stabilising fluctuations.
But let's begin with the other side of the coin, so to speak, with debt financing. Debt contract terms don't normally adapt to suit the borrower's situation. The redemption amount doesn't change when the borrower runs into difficulties. Risk is only shared with the lender if the latter grants further credit to bridge the difficult spell or agrees to a haircut if the borrower becomes insolvent.
The value of equity capital, by contrast, always moves in line with events. Equity capital is rather like an insurance policy against risk and creates a buffer that can absorb losses. Boosting the role played by equity capital financing thus curbs the incidence of insolvencies and diminishes fluctuations in investment and growth. Let us not forget that equity capital showcased this stabilising quality during the course of the European debt crisis. Debt financing in Europe was seen to be more susceptible to capital flight than was equity capital financing.
This experience would suggest it is worth considering doing away with the unequal tax treatment of equity and debt capital. Reforming the corporate taxation regime is naturally a difficult task, and strong political will would be needed to push it through. But introducing a more neutral tax regime for equity and debt capital would not only reduce the appeal of being highly leveraged, but also boost efficiency levels across the board.
As for the goal of integrating Europe's capital markets more deeply, there are a number of areas offering quick wins, one of which is the market for high-quality securitisations. Although Europe's securitisation markets came through the financial crisis relatively unscathed, they are lacklustre by comparison.
That's why a handful of initiatives have been launched to rekindle the continent's markets in securitised products. These include the European Commission's efforts to establish a framework for simple, transparent and standardised (STS) securitisations. Emphasising these three qualities is crucial, given the lessons learned from the crisis. The securitised products which contributed to the crisis were neither simple, transparent nor standardised. Quite the opposite, in fact - there was a proliferation of complex and opaque products that led to the problems we are all too familiar with. So in my eyes, the Commission's initiative is a sensible move to revitalise the securitisation market and promote the flow of funding to the real economy.