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Speech by Commissioner Hill: The Role Financial Markets can play in Growth and Jobs

IMG_1301Lord Hill

European Commissioner for financial services, financial stability and capital markets union

Securities Industry and Financial Markets Association (SIFMA)

120 Broadway, New York City

27 February 2015, 13:00

Opening

Good afternoon ladies and gentlemen. Thank you for inviting me here.

I am delighted to be here on my first trip to the US as a new European Commissioner. I’ve just had two days in Washington DC talking mainly politics and regulation. But I’m someone who doesn’t think that you should regulate without doing your best to understand the impact of what you do on the marketplace. So I am just as keen to meet people and businesses affected by what we do in Europe. The global nature of finance means that many of them are here in New York.

My department at the European Commission is called the Directorate General for Financial Stability, Financial Services and Capital Markets Union. Obviously no one ever calls it that unless they really have to or they need to play for time. So it has been shortened to DG FISMA. Seeing SIFMA on the walls here makes me feel almost at home.

But I know we share something more than just being an anagram of an acronym. We share an interest in well-regulated financial markets which make the wheels of the economy turn.

Restoring growth

Financial markets are once again playing that role post-crisis, in particular here in the US where you have recovered faster from the crisis than we have in Europe, growing at almost double the EU rate last year.

But the recovery is now beginning to take hold in Europe. Growth is returning. Not as fast as we would like, but with a combination of tough structural reforms, fiscal consolidation and quantitative easing, I believe we can start to look to the future with growing confidence.

We at the European Commission are doing what we can to support the recovery.  We are clear that our top priority is jobs and growth. That is why our first act, just three weeks in to the life of the new Commission, was to launch a 350 billion dollar Investment Plan to boost investment into long-term infrastructure projects. It is why we are encouraging EU countries to remove red tape, regulatory bottlenecks and other barriers to investment. And it is why we have launched a new drive to extend the single market, not just in my area of capital markets, but in energy and digital services too.

Financial sector contribution to growth and jobs

So how will I support these priorities? And how do I think the financial sector can help boost growth?

First by ensuring that we have a strong, stable banking system that can lend to the wider economy. We have already done a huge amount of work to make that happen. Our banks are now much better capitalised. And with the Banking Union we have strengthened our supervisory system. It was good to hear in Washington that people there think that our recent stress tests were tough and credible. I will continue to work hard to make sure that things stay on the right track.

The second way is by developing stronger and deeper capital markets. As you know, Europe has traditionally been much more dependent on the banking system than you are in the US. Medium-sized companies here receive five times as much funding from capital markets as they do in the EU.

And the US venture capital market is about five times bigger than it is in the EU. If European venture capital markets were as developed as they are in the US, companies would have been able to tap into an extra 90 billion euro of funding between 2008 and 2013. More than 4000 venture capital deals could have been struck.

But I am glad to say there is now support across Europe for us making a renewed push on completing the single market for capital and increasing the contribution that capital markets can make to our economy.

If we can get it right, businesses large and small will be able to raise finance more easily from across the EU; people saving for their future and retirement will be able to benefit from a wider range of affordable investment opportunities; the cost of doing business cross-border should fall and investors from the US and all over the world will want to invest in the EU because they know our capital markets offer more opportunities while being safe and stable.

And of course having more diverse sources of funding will itself contribute to greater financial stability.

Capital Markets Union

That is why we want to create a Capital Markets Union for all 28 countries in the European Union. Put at its most simple, its aim at is to link savings with growth. We want to remove the barriers that stand between investors’ money and investment opportunities; overcome the obstacles that are preventing those who need financing from reaching investors; and make the system for channelling those funds – the investment chain – as efficient as possible.

Some of the obstacles, insolvency and securities laws for instance, or the way debt and equity are treated in different tax regimes, are issues we have been grappling with in Europe for decades. But there are others where I think we can make some early progress.

These include making it easier for small firms to reach investors in other countries through revised prospectus rules; starting work to improve access to SME credit information; encouraging take-up of our new European Long-Term Investment Funds; and supporting an industry-led initiative on  pan-EU private placement standards.

Another important strand of our work will be to help to build a market for highly transparent, simple and standardised securitisation instruments in the EU. This would serve two purposes: it would help free up banks’ balance sheets so they can lend to households and businesses, and it would form a bridge between banks and capital markets.

If SME securitisations could be returned – safely – even to half the levels they were in 2007, this could be equivalent to some €20bn of additional funding.

We are already tackling the treatment of securitised products through the detailed liquidity rules we apply to banks and insurance companies. But we are now consulting on the best ways to single out a category of highly transparent, simple and standardised products, something that central banks, regulators and the financial sector have long been calling for.

This doesn’t mean that we will be going back to the bad old days of subprime mortgages. To the highly complex, opaque and risky securitisation instruments which were part of the crisis, our door will remain firmly closed.

This will be a long-term project that we will need to build step by step from the bottom up. There won’t be a silver bullet or a single lever I can pull. The way ahead will be by an accumulation of measures, identifying barriers one by one and working out how to overcome them. We launched a consultation ten days ago to kick that process off. I am very keen to get comments on it, not just from within the EU but from businesses here in the US if you have ideas you would like to contribute.

International coordination

Now, one of the themes to which we kept returning in Washington was the question of international cooperation.

Financial markets underpin the global economy so by their very nature they are cross-border markets. At the same time, as we saw in the recent crisis, problems in one territory can rapidly cause problems in another one.

So when implementing regulation, we need to consider the needs of companies active in more than one jurisdiction, particularly in Europe and the US as our markets are more interconnected and interdependent  than any other in the world. We are each other’s most important trading partners. In 2012, US companies’ invested three times more in the EU than they did in the entire Asia-Pacific region. And European foreign direct investment in the US was four times bigger than that from the Asia-Pacific region.

Those business links need financial underpinning, and how we implement our rules has a direct effect on that. We need to ensure that our domestic rules work together and we do all we can to remove loopholes and overlaps so that competition is fair and that our financial systems are stable.

When we look at regulatory cooperation between the EU and US, my starting point will always be pragmatic, not theological. I have no interest in simply creating work for regulators and lawyers. Our aim should be to act in such a way that businesses, on both sides of the Atlantic, can grow and create jobs.

So I want to work closely with my colleagues in the US on making sure that our rules can be applied in a way that makes sense for us both, and for businesses active in both markets.

Generally speaking, we work well together, and when we do so, we achieve results, as we have done with our united stance on sanctions against Russia. Upstream co-ordination between the two of us works.

I am glad to say that in the area of financial regulation, we agree far more often than we disagree. But we still sometimes have problems and situations in which we are forced to scramble for last-minute fixes, as has been the case in the negotiation with the CFTC over cross-border swaps.

Of course we don’t need to have exactly the same rules but to me, it would be sensible for us to work more closely together and earlier on so that we don’t have to thrash things out later when the clock is ticking.

That’s why we in Europe we think we need to have a more solid system for regulatory cooperation. Which brings us to the Transatlantic Trade and Investment Partnership.

[TTIP]

We view the main added value of the TTIP as lying in regulatory cooperation – in the so called “behind the border issues”, not just cutting  tariffs because in highly regulated markets such as financial services, regulation can act as a barrier to free trade.

We want to strengthen the arrangements we currently have and develop a more structured framework of regulatory cooperation.

Better cooperation would allow us to entrench the leading role the EU and U.S. play in setting global standards for financial regulation. And it would give us the framework within which to consult each other at an early stage in the regulatory process. By implementing international standards in a consistent way, and by having close supervisory cooperation, the EU and US would be able to rely on each other’s rules as long as they achieved the same outcomes.

This would remove the frictions that make life difficult for global businesses, imposing costs on them and creating opportunities for people to game the system through regulatory arbitrage.

It would also be a better guarantee of financial stability as emerging or potential problems would be spotted together through supervisory cooperation and addressed in a coordinated way.

The role of central counterparties, for instance, has been strengthened through our legislation and they are becoming more and more important. Around 570 trillion dollars of global risk is centralised in a handful of global CCPs. If one of these were to fail, the consequences could be devastating, and would be felt worldwide. So Europe and the US need to cooperate at an early stage and decide together how the risks of a failing CCP could be tackled safely.

Now I know that that the enthusiasm for anchoring financial regulatory cooperation in the TTIP is stronger among the Europeans than our American counterparts.

Some of this may be because, as in other areas of TTIP, there are myths and misunderstandings. We are not trying to make the EU and US legislation the same. We are not trying to call into question the role of independent regulators. And we do not want to risk the financial stability we have worked so hard to restore by undermining Dodd-Frank.

But we do think it makes sense to do what we can to make our rules compatible. So that global businesses can operate more easily. And so that we have a larger and more efficient marketplace which should allow businesses to finance the rest of the economy more easily thereby helping create jobs and boost growth.

Conclusion

In my role in charge of regulation of the EU financial sector, I will do all I can to help the European economy to start growing again and to make it possible for the financial sector to be an engine of global growth. I also want financial services to be seen as part of the economic mainstream, not cut off from society at large. I have never believed that we make our economy stronger by making our financial services weaker.

But to be seen as part of the mainstream, the financial sector has to change too. In the wake of the crisis and the scandals we sadly keep seeing, there is a big job to be done in rebuilding trust. I know you don’t want ever more prescriptive regulation matched by ever larger compliance teams. And nor do I. But then there needs to be a change in values and culture and a reconnection with society, businesses and the customers you serve. If you can do that, you will find in me someone who will champion the contribution you make to growth and jobs.

Ladies and gentlemen, I am optimistic about the future. I believe that the EU and the US have a great partnership. What divides us pales in comparison to what unites us. Our two continents need to work together in the face of common challenges, whether that is in setting standards, responding to events in the wider world or dealing with new risks posed to the sector by cybercrime.

We are at the forefront of an increasingly globalised financial sector. Let us make sure we retain that leadership and harness the power of financial services for the economy and for society as a whole.

Thank you.