Highlights from Finance for Growth Conference

Highlights from “Finance for growth” conference

On 6 November 2014, the European Commission hosted a conference dedicated to long-term financing, which was co-organised jointly with the Italian Presidency.

The conference was opened by Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union.

In his opening speech, Lord Hill said he would look at everything through the prism of jobs and growth. He stressed that the financial sector needs to explain more what it does for the society as a whole.

As immediate priorities he listed:

• Implementation of legislation already passed (400 implementing measures)
• Banking Union
• Proposals on Monet Market Funds, benchmarks, Bank Structural Reform
• International consistency
• To explore how to bring benefits of single market more directly to consumers (safe and affordable retail products, digital services)
• Capital Markets Union project

Lord Hill stressed the need to develop alternative to banking sources of funding, and to reduce cost of capital. He mentioned that US companies get 5 times as much capital from capital markets in comparison with the European ones. His ambition is to make capital markets work for businesses and especially SMEs. He envisages expanding listings on growth markets anywhere in EU and to promote crowd funding. He pointed out that savings are concentrated in respective Member States, markets are fragmented, and equity is disadvantaged towards debt. Investors lack comparable credit information on smaller companies.

Following identification of obstacles, Lord Hill envisages economic analysis and a wide public consultation.

As main objectives of Capital Markets Union he foresees:

-Investors to be protected and have access to all EU capital markets

-Capital to flow freely across the EU to where it is most needed

-Benefits to investors, businesses, jobs and growth

Immediate measures:

-ELTFs (hopes to finalise by the end of this year with the launch in 2015)

-Safe securitisation

-EU covered bonds and private placement

In the longer term he also plans to improve SME credit information.

Action plan to be launched by summer 2015

Panel II: Relevant players in the market for long term capital

Jacques de Larosière, chair Eurofi

-Policy makers need to be careful not to puttoo much pressure on the EU banking system, as European banks do not benefit from similar advantages as US banks, e.g. government subsidies, etc.

-Need to organise the transition towards long-term financing without rushing;

-Without savings there is no investment. Deposits are still the most important source of bank funding (60%);

-Matching long-term investment with short term savings poses a major challenge;

-We need incentives for savings. What do we do to incentives capital formation? For the moment nothing, as the tax system favours debt, while it discourages equity. This led to excess lending.Holding shares is also discouraged by institutional investors;

-Lord Hill has incredible opportunity to sit back, see what has been done and what needs to be done to improve the situation;

-Infrastructure projects can no longer be financed by banks only, need for new financing models and a special asset class for infrastructure projects. Empirical evidence for recovery of infrastructure bonds is overwhelming.

Dario Scannapieco, European Investment Bank

-There has been 20%reduction of investment level comparing to pre-crises;

-3 priorities to focus on:

• Support to SMEs
• Support to infrastructure R&D
• Providing advisory services to produce bankable projects

-Lack of equity is a pressing problem for SMEs: cannot finance innovation with debt – need equity;

-Many companies swapped from bank borrowing to debt securities (bonds), but this is possible only for companies of certain size and international exposure (debt issuance has risen from 7,5% in 2011to 11,8% in 20013);

-Need to develop instruments together with the Commission to help SMEs to go through different stages of finance;

-Business Angels – supportjointly with the Commission by doubling the capital;

-More than 1/3 of venture capital is coming from private players – we should incentivise institutional investors to invest inSMEs; e.g. European Investment Fund supports Europe's micro, small and medium-sized businesses (SMEs) by helping them to access finance by designing and developing venture and growth capital, guarantees and microfinance instruments which specifically target this market segment. EIF’s total net commitments to private equity funds amounted to over EUR 7.9bn at end 2013, with investments in over 435 funds which created 32 billion investment in SMEs;

-We cannot penalise investors with regulatory overshooting;

-Differentiating good and bad quality securitisation: need to revitalised Asset-Backed Securities;

-Infrastructure projects: promotion of projects with national promotional banks. EIB can share its expertise on Europe 2020 project;

-Role of finance for EU business: eliminated constraints towards risk taking capacity, offer advisory services. He mentioned multinational task force report to be ready for the December EU Council

Ulrich Schroeder, CEO KfW, promotional bank

-EU shifts into more US structure of finance

-Need to differentiate whether we have finance demand or supply problem. Some think that it's only supply (liquidity) while he thinks it's more a demand problem: e.g. in Germany there is too much liquidity for SMEs financing;

-But in Germany there is a problem with getting finance for smaller scale infrastructure projects;

-Banks have plenty of short-term liquidity, but lack long-term liquidity. Commercial banks deleveraging will continue;

-Promotional banks will play an important role in long-term finance;

-Change in behaviour of institutional investors: e.g. insurance companies start entering at the beginning phase of infrastructure projects;

-Use cheap government loans instead of grants and make it as simple as possible – this is how Germany used Marshall plan in an efficient way avoiding excessive bureaucracy – theystill benefit from those funds.

Emma Marcegaglia, chair of BusinessEurope

Five recommendations:

-Implement banking Union ensuring that prudential rules strike the right balance between risk and impact on companies;

-Promote tax system that supports long-term investment (avoid financial transaction tax);

-Need for public funds / public - private partnerships,leveraging private investments: EIB and promotional banks have a role here;

-Develop alternative sources to bank lending, e.g. capital markets for SMEs-small bonds and equity: Commission should promote dissemination of best practice: e.g. corporate bonds trading platform, AlterNet in Netherlands, etc.

-Securitisation: welcomed initiative of ECB

-Equity needed - venture capital industry in EU continues to be much smaller than US: we should develop best practices and understand the reasons;

-Crowd funding: the EC can share practices, play supporting role and find the right balance of regulation: security but keep it competitive:

-Encourage entrepreneurs to invest in EU - look at reasons why companies choose to stay and invest privately in EU;

-We should support private investment and remove all obstacles to it: heavy regulatory burdens, uncompetitive tax regimes, high energy costs, etc.

Panel III: How to develop capital market financing in the EU

Steven Maijoor, chair of ESMA

-Capital Markets Union should maximize the benefits of capital markets and non-bank financial institutions for the real economy (quoting Juncker);

-"The CMU should be based on an accelerated integration of the capital markets”

-He stressed that the integration should be about all 28 MS, referred to company law directives and that investor confidence should be above all;

-Objectives for next 5 years:

• Greater diversity in funding (investment funds, securitisation, crowd funding) IPOs;
• Increasing the efficiency of capital markets: need for deep and liquide capital markets; barriers: accounting, corporate governance; Oxyra study shows average cost for investors to understand regulatory aspects 430 euro in EU versus 58 euro in EU; need to look at regulation with the biggest impact; Should we harmonise corporate governance, SRD, Prospectus?
• Strengthening and harmonisation of supervision: supervisory convergence is important to make it internal market in practice; similar supervisory approaches of all 28 supervisors, or shall we focus on the outcome leaving flexibility on how to get there?
• Increasing the attractiveness of capital markets both for EU investors and for investors from outside the Union: in order to have vibrant markets we also need retail investors, while only 36% of retail investors trust financial services providers. Restoring trust of investors will be important part of capital markets Union: already on the way with MiFID, PRIPs .

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Philippe De Backer, MEP

-Identify existing barriers for investors to come in and how end-users use existing projects;

-Role of intermediation; not deregulation but re-regulation and need to align incentives;

-How can we reduce fragmentation and home bias: need for the debate on taxation and with capital markets participants on diversity and complexity of capital markets;

Questions to answer:

-Why liquidity is not being well channelled to participants?

-How we can ensure that retail investors get the right balance of investor protection and encouragement to enter the markets?

Solutions:

-New developments and initiatives, e.g. crowdfunding;

-Financing of SMEs: IPO markets and venture capital;

-Much more harmonisation may be necessary as home bias, gold plating could prevent Capital Markets Union

He mentioned his report on financing SMEs and IPO Task Force, conclusions of which should be taken into the debate.

Jurgen Fitschen, Deutsche Bank

-Biggest hurdle is the culture of European entrepreneurs: they are not used to answer all the questions from investors who need transparency;

-Need for simplified documentation, giving understanding of risk and reward;

-Need for public political acceptance of the system andeducation of all parties involved

Alexander Justham, CEO LSE

-We need transparent risk and to reconcile citizens with capital markets: citizens have to take risks;

-In terms ofwhat exchanges do to help, he mentioned AIM-world’s most successful and largest SME market and ELIT programme that bring SMEs together to develop networks, meet advisors, angel investors, etc.

-We have efficient markets for blue chips – now need to create them for SMEs;

- ESMA system has an important role in terms of harmonisation and practice consistency.

Panel IV: The Policy response and way forward

Roberto Gualtieri, MEP, chair of ECON

-Verify whether current regulatory framework regarding investorscontributes to long-term finance;

-Actively engage with the Commission on Capital Markets Union: defining standards for securitisation, develop private placement, facilitate cross-border information, creation of a single rule book;

-EU fund on strategic investment;

-Revision of governance framework.

Jeroen Dijsselbloem, chairman EUROGROUP, Minister of Finance, the Netherlands

-Strongly supports CMU: he would see one EU insolvency regime and one centralised systemon SME credit information;

-300 billion funding package announced by Juncker is important and he looks forward to Juncker’s proposals in December;

-Need to improve investment climate in the EU what requires structural reforms.