The EU has continued to expand its policy and regulatory framework, referred to as the Capital Market Union (CMU), to promote capital investment rather than bank loans. On 8 June 2017, the European Commission (EC) launched its so-called Mid-Term Review Action Plan with the purpose of finalising the CMU by 2019, when the current Commission and European Parliament period is over.
The first phase of building the CMU was finalised on 31 May 2017 when the European Parliament and the Council of Finance Ministers agreed, after a long process with huge disagreements, on two flagship Regulations to stimulate standardised securitisation, i.e. packaging loans (e.g. for mortgages or sustainable projects) to investment funds whose shares are then sold to investors. This would remove most but not all the credit risks from banks’ balance sheets and spread them into the financial markets, creating risks similar to those that created the 2008 financial crisis. The CMU Mid-Term Review Action Plan goes a step further and the EC will present measures to securitise non-performing bank loans and issue new financial products for infrastructure loans, in order to sell them to the (institutional) investment market. This would relieve the banks’ balance sheet from the bad or risky loans, which many think are preventing them from lending to the economy. However, as a result the risks and bad loans are transferred to investors rather than that banks writing off their loans – resulting in less profit for their shareholders but less debt burdens for households and thus stimulating demand. The EC mentions in its staff working document that interested investors are hedge funds. No mentioning is made of the fact that hedge funds can be so-called ‘vulture funds’ that buy up bad loans at much reduced value and then require full repayment by the defaulting lenders.
As part of the CMU review, the EC outlined a range of priority actions, including:
- Strengthening the supervision mandate by the European Supervisory. Authorities (ESAs) and also ensuring that supervision is equal across all EU countries (“supervisory convergence”) and ensure that they can deal with the challenges. The current review of the existing EU regulation of ESAs will especially focus on the European Securities and Markets Authority (ESMA).
- Initiatives will be taken to stimulate investments across borders of EU countries, including capital market capacity building for the central, eastern and south eastern (CESEE) regions.
- In order to promote longer term investment by insurance companies and pension funds, law changes will be considered to relax regulatory requirements.
- Since innovative businesses that use new technology for financial activities (FinTech) are transforming capital markets the EC intends to lower costs for businesses and investors by increase competition in the whole of the financial sector.
- In order to face environmental and social challenges, the EC will prepare measures to better integrate sustainability or environmental, social and governance (ESG) aspects in rating methodologies and supervisory processes, as well as in the investment mandates of institutional investors and asset managers. It will also consider sustainability in upcoming (reviews of) financial legislation as well as the recommendations by the High Level Expert Group on Sustainable Finance.
Some proposals will affect citizens directly:
- The EC launched a legislative proposal on a pan-European personal pension product, i.e. individuals can invest in (additional) private pension fund separate from the public pension schemes, based on capital market investment strategies on capital markets (for more information, see the EC’s proposals and comments.
- The EC has observed that EU citizens have one of the highest saving rates worldwide, and predominantly hold savings in cash at banks. According to the EC, this generates insufficient returns to meet long-term objectives such as education and pensions for an ageing population. Individual investors are also viewed as those who keep the share market and bond market going, which could help finance businesses. Therefore, the EC would like to stimulate more citizens to invest in financial markets by making the latter more competitive and transparent. The fact that citizens are reluctant to make such investments is considered behavioural bias, rather than recognising that they are taking into account the risks of losing money during financial instability and crises, or that the current situation of low interest rates leads to a low return on savings. Moreover, the more bank clients invest, the more banks themselves get income from fees, in with their change to a fee-based profit business model.
The details of the proposed measures, policies and regulatory frameworks actually reveal quite a few changes that would make existing regulation less strict and infuse more risks and instability into the financial sector. They are framed in such a way that they stimulate the economy, including small and middle enterprises (SMEs), but in fact seem to be more oriented on meeting the needs of large financial investors and banks, and on making the financial sector more competitive – not more safe. NGOs have complained and documented that their views were not being taken into account during the consultation for the mid-term review.