Financing the Europe of tomorrow

In September 2018, the European Banking Federation (EBF) organized a summit on Financing Growth where it presented its vision paper: “Financing the Europe of Tomorrow – How to unlock Europe’s latent growth potential”.

For several years since the 2013 crisis, public discourse on the banking sector justifiably focused on how to regulate the banking sector to achieve more financial stability. This led to stricter rules, higher capital requirements as well as greater transparency. The European Banking Federation, recognizing that banking stability is a necessary but not sufficient goal for banks, has published this vision paper where it outlines the role of banks as agents to fuel dynamic, sustainable and strong economic growth in Europe.

To be able to fulfil this role, while at the same time not sacrificing safety and stability, EBF outlines its recommendations for:
• enabling banks to provide more financing to corporates and households;
• building and integrating capital markets;
• bringing more investors into the market;
• ensuring fair competition; and
• achieving sustainability.
The vision outlined by EBF is: An integrated, single European financial sector that fuels dynamic, sustainable and strong economic growth.

Europe needs more capital markets but not less banking
EBF emphasizes that each type of financing has its unique features which benefit the economy. Far from being mutually exclusive, market-based financing and banking finance work together to meet the needs of companies and investors. For both corporates and households, bank financing in Europe remains the cornerstone of economic activity and forms the basis of access to other kinds of financing. Therefore, instead of “reducing dependency to banks” Europe should focus on promoting the diversity of funding for different needs.
To ensure that bank lending continues playing its role in meeting economic actors’ needs, a priority from a policymaker and regulator perspective should be to review and where necessary revise the current prudential regulation where it hinders banks’ lending capacity (for both capital and liquidity issues). In addition, companies’ access to basic bank services must not be constrained through excessive regulation. Furthermore, more focused use should be made of public and blended finance funds (such as those of the EIB, EBRD) to avoid crowding out private financing. EBF also advocates facilitating cross-border retail banking activities to create a truly integrated banking market across the EU.

Strengthening European capital markets with coordinated action
EBF explains that a deeper, more diversified and larger capital market strengthens the resilience of the financial system and mobilizes greater amounts of savings that can be put to efficient use in the economy. However, European capital markets remain small and underdeveloped compared to the size of the economy, whereas the goal of an integrated Capital Markets Union remains elusive. EBF believes it is very important to address this, since strengthening European capital markets will strengthen the banking system as well as the economy. The key priorities of the banking sector are as follows:
– Establishing a Europe-wide discussion through a “Wise Person Committee” to define the fundamental structural obstacles that stand in the way of an integrated Capital Markets Union,
– Promoting best practices from regions that have successfully developed their markets,
– Promoting a more calibrated regulatory framework to enable local actors (banks, accountants, advisers etc) to access capital markets and fulfil their roles within them effectively,
– Developing private equity markets and alternative ways of financing to function as complements to capital markets,
– Developing a well-functioning pan-European securitization market, in particular for SME and real estate loans,
– Ensuring that regulation does not limit banks’ capacity to finance the economy in terms of funds available or activities that can be offered,
– Building an equity culture in Europe supported by better opportunities for investing in capital markets.

Bringing the investors in through investor protection and financial education:
Recognizing that investor protection is quintessential, EBF proposes a number of measures to ensure that a spectrum of attractive investment opportunities is available to investors, in a transparent and accessible manner. EBF is advocating for more initiatives to reduce obstacles for investors to invest cross-border. To promote financial literacy, EBF has spearheaded an initiative called the Financial Education Platform and will seek for more ways to cooperate with the public sector to build up the skills of retail investors. In addition, EBF believes in giving greater choice and control to retail investors through well-targeted regulation.

Fair competition inside and outside Europe:
EBF outlines the need for banks to face fair competition, to ensure that households, companies and investors of banks will benefit from access to the best possible services, on the best possible terms. According to EBF, the major aspects affecting competition in the European financial sector relate to:
– the digital field, where the regulatory environment must allow competition from new non-banks (“fintechs”) based on equal treatment, that is, the same services and risks should be subject to the same rules and supervision,
– international competitiveness, where European banks must be allowed to face fair competition against their global competitors; and
– the competitiveness of the EU’s capital markets, which must maintain their attractiveness to investors and issuers.

European banks’ commitment to sustainability:
EBF stresses that banks can pay a key intermediation link to a greener and sustainable business environment. In this context, European banks are actively promoting international best practices to meet the increasing demand for green, social investments. An example of this is the engagement of a number of leading banks to help establish the Principles for Responsible Banking under the United Nations Environmental Program – Finance Initiative (UNEP-FI). Furthermore, European banks support the European Commission’s Action Plan on Sustainable Finance to achieve the Paris climate targets and will align themselves with this plan to deliver on these goals. EBF advocates further analysis of possible ways of incentivizing green lending and investment through the review of capital requirements, without jeopardizing the effectiveness of the current risk-based prudential network in the EU.

Christina Antoniou Pierides
Christina Antoniou Pierides
Senior Advisor / ACB