EACT Summit 2019: Political and Regulatory Trends Shaping Europe's Financial Markets in the Coming Years

by Eleanor Hill, TMI

Presenter:

Sean (John) Berrigan, Deputy Director General for Financial Stability, Financial Services, and Capital Markets Union (DG FISMA)

Europe in 2019: A Financial Snapshot from the European Commission

One of the key projects on the agenda of DG FISMA, the department of the EC responsible for EU policy on banking and finance, is the Capital Markets Union (CMU). It is three and a half years since the EC launched the CMU action plan with the aim of creating a single capital market for Europe.

The CMU will boost economic growth and job creation. In addition, the CMU will enhance economic and financial resilience by diversifying the available financing sources within the EU. And the economic and financial rationale underlying the CMU is increasingly valid after Brexit – without the City of London, the EU financial system will be more bank-dependent than it is today. This will result in a greater need to diversify the sources of financing available to the EU economy.

Much progress has been made towards CMU, but the new EC, when elected later this year, will still have work to do. EU capital markets remain largely fragmented along national lines and a lack of supervisory convergence is impeding development of a credible, effective and integrated single capital market.  

Another focus for DG FISMA is to enable the euro to play its full role on the international scene. Recent events such as restrictions on the use of the US dollar and China’s increasingly active role in promoting the internationalisation of the Renminbi, have brought into sharp focus the need to deepen Europe’s economic and monetary union and build deep and liquid capital markets. 

The EC wants to secure the integrity and stability of the euro-based financial system internally, remove obstacles to the use of the euro by market participants, and increase the attractiveness of the euro area economy and financial system for external investors. The key to realising these ambitions is to underpin the euro with an economic and financial system that can compete with other major jurisdictions – through long-term projects such as the CMU. 

In the more immediate future, the Commission’s proposals around new interest rate benchmarks should help to boost the role of the euro in financial markets.  The EC is actively involved in work to transition from the EONIA benchmark to a new risk-free rate to be called €STR, which will be EU law compliant. The EC is also seeking to gather knowledge around the obstacles to efficiently trading the euro against other currencies, and a consultation on this topic is open until the end of March 2019.  

Furthermore, the EC will continue to work towards building a fully integrated, cross-border, instant payments system for the EU, to complement current card schemes. Fostering innovation in payments through promoting open market standards will also remain a key focus, with the Revised Payment Services Directive, or PSD2, opening up the payments market to third parties like fintechs.

Moreover, the Revised Cross-Border Payments Regulation will ensure that by 15th December 2019 all EU citizens and businesses have the right to make cross-border payments in Europe for the same price as a domestic payment in their national currency. By putting an end to high fees linked to cross-border euro payments, estimates suggest that this could save consumers and businesses in non-Euro member states circa €900m per annum.  

Finally, sustainable finance remains a priority for the EC. Three key proposals are being considered in this area. Firstly, a regulation to help create a taxonomy around what can be considered an environmentally sustainable economic activity. Secondly, a regulation to introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors in their risk processes. And thirdly, a proposal for a regulation amending the benchmark regulation, to create a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, which will provide investors with better information on the carbon footprint of their investments. 

As much as the EC will continue to work hard towards these goals, the contribution of other stakeholders is indispensable. As such, the Commission will also co-operate closely with national governments, the European Central Bank, commercial banks, payment providers, market infrastructures, and the broader business community, to help achieve its vision for Europe’s financial future.  

Key takeaways

  • The Capital Markets Union is progressing, but there is still much work to do. Brexit makes delivering the CMU even more critical, since the need to diversify the sources of financing available to the EU economy will increase.

  • The EC is working hard to transition from the EONIA benchmark to a new risk-free rate to be called €STR. This should help to bolster the role of the euro in international financial markets.  

  • The Revised Cross-Border Payments Regulation comes into force on 15th December 2019. This will reduce the cost of intra-EU payments within the entire EU, to the same as a domestic payment. The revised Regulation also makes currency conversion charges fully transparent.

  • Achieving climate neutrality by 2050 in Europe will require significant effort and investment. Corporates have an important role to play in re-orientating towards sustainable financing and sustainable investments.