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[...] Europe needs investments – up to 2 trillion euro by 2020. We need investment to upgrade and modernise; to adapt to a low carbon world; and to adjust to an ageing population. But to continue to attract that investment, we’re conscious Europe needs to be somewhere it’s simple to do business: a single market that’s growing and offering a good return on your Hong Kong dollar or Renminbi.
That is what is driving me forward in my work to build a single market for capital – what we are calling a Capital Markets Union. Europe’s commitment to a single market for capital is longstanding: it dates back over fifty years. But we are making a major new push to strengthen and deepen it. Europe, as you know, has traditionally had a financial system very dependent on banks. Europe's economy is about the same size as America's, but our equity markets are less than half their size. In the US, SMEs get about five times as much funding from the capital markets – or non-bank financing - as they do in Europe.
A bigger role for capital markets, to complement bank financing would give European business a bigger choice of funding. By bringing down cross border barriers, we can create opportunities for successful businesses to sell into bigger markets while reducing operating costs. That is true for European businesses operating within the EU, but also for businesses and investors from outside the EU who want to do business and invest there. And by reducing dependence on one source of funding well-regulated capital markets can also increase financial stability.
I recently published a Capital Markets Union Action Plan that is broad in sweep and ambitious in scope. It takes a long term, step-by-step approach to eliminate legal and administrative costs to cross-border operations across Europe.
As a priority, it focuses on removing barriers to small firms raising money from capital markets, and how we can better connect information on investment opportunities in SMEs to investors the world over. We will improve the system that allows investment funds to operate across the EU. And over a longer period, we will tackle entrenched cross border barriers to the free movement of capital, ranging from differences in nation laws on insolvency, tax and securities through to obstacles arising from a fragmented market infrastructure.
We have already announced some immediate measures to build early momentum. We are taking steps to revive our securitisation markets and to make it more attractive for investors like insurance companies to invest in long-term infrastructure projects by lowering the capital requirements associated with these investments by about a third. We also want to make it easier for companies to raise capital on the public markets. So another early action will be a major overhaul of the legislation that governs the issuing of prospectuses.
I am keen to anchor CMU in the international financial system and global standards. As we press ahead, I will continue to work closely with the Financial Stability Board and the International Organisation of Securities Commissions. But as we leave the crisis behind us, when considering legislation I am keen to consider its impact on jobs and growth.
That is why as part of the CMU action plan – and in line with G20 and FSB work - we are having a look at the cumulative impact of the legislative reforms we have introduced over the past five years. If you legislate at speed, as we had to during the financial crisis, you cannot expect to get every bit of regulation right. So now we are checking that when you look at this legislation in the round there have been no unintended consequences, that we have got the balance right between managing risk and supporting growth. [...]
But just as we in Europe are keen to open our markets, it is important that these positive developments - that will increase the size and depth of markets - also increase competition.
With this in mind we are of course particularly keen for EU funds to be able to continue to offer their services to investors seeking to diversify their investments. I understand that Hong Kong is hard at work developing standards for a new investment fund that takes inspiration from Europe’s successful UCITS model. This competition should be positive, but we are keen to see UCITS recognised for the well regulated platforms that they are in the mutual recognition agreement between Hong-Kong and mainland China.
I want us to strengthen still further our trade cooperation in financial services. To do that, we must keep up work on the agreements that make EU-HK trade relationship easier. And that we continue to do this in line with international practice and standards to maintain strong and transparent regulatory regimes.
I am pleased that the EU has granted equivalence to Hong-Kong Credit Rating Agencies; and that we have also recently recognised Hong-Kong's regime for central counterparty clearing houses. We must now quicken the pace and reach an agreement on the sharing of data for derivative contracts to improve transparency and informed investment decisions. And mutual recognition agreements on prudential legislation and audit systems could reduce the legislative burden on firms wanting to establish themselves on either side of the Eurasian continent.
Such issues are important in today's international, integrated markets. I am therefore keen to see how we can improve international cooperation and coherence between regulators in the EU and Asia-Pacific. So I would like to work with IOSCO, the International Organisation of Securities Commissions, to explore what we can do to strengthen our cooperation in this area.