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Provided it is sufficiently regulated, securitisation can help to fund the economy and share risks within the monetary union. Securitisation combines the advantages of banks in lending and of financial markets in financing. However, a lack of standardisation and legal harmonisation currently prevents the EU from reaping the benefits of this instrument. Weakening the prudential framework will not create a truly European market but may pose new risks to financial stability. Instead, this Policy Brief argues that to scale up securitisation, overcoming the fragmentation in national contract and insolvency laws in the longer term will be key. In the meantime, the European Commission should cut unnecessary red tape and establish an EU-wide standardised securitisation product tailored to an asset class that shows sustainable growth potential. Renovation loans are a promising option.
The EU is discussing better regulation. The issue is urgent. Nothing less than the competitiveness of European companies and the acceptance of the EU are at stake. But beware – neither symbolic politics nor broad deregulation will help. Instead: here are four concrete measures that could substantially improve the quality of EU regulation.
What Europe needs is not a regulatory pause, but better legislation. In record time, the EU has rolled out a comprehensive disclosure regime for sustainable finance. But the nascent regulatory framework is challenging to implement, remains vulnerable to abuse by those seeking to game the system and fails to provide meaningful guidance to investors. Despite detailed legislation, financial market participants differ significantly in their expectations of sustainable investment products and face the risk of greenwashing, where issuers - intentionally or unintentionally - make misleading sustainability claims. To enable private investment to finance Europe’s transition to net zero, this policy brief proposes short-term measures to combat greenwashing plus reforms that should be adopted once the next European Commission has assumed office. For the EU to uphold its status as a global benchmark for sustainable finance, lawmakers and regulators must urgently improve the rules in place and ensure that they are applied consistently across member states.
Funding remains the Achilles heel of the EU Green Deal. Europe needs to spend an additional €350 billion on climate action every year until the end of this decade. The bulk of sustainable investment is expected to come from the private sector and the InvestEU programme has been established to leverage private investment through the European Investment Bank (EIB) Group and other public financial institutions. However, overly ambitious target volumes backed by only limited public financial support, and the resultant high levels of leverage, prevent InvestEU from delivering its full potential for achieving the green transition. To plug the green investment gap, InvestEU needs to reduce its leverage, increase its transparency on intermediated operations and be complemented by fresh public spending at EU level to finance transformative investments that fall outside the scope of what public de-risking of private investments can achieve.
Get your priorities right – Europe must not underestimate the role of banks for the green transition
(2023)
EU policymakers and the financial sector have placed high hopes in forging a green capital markets union. However, the idea that capital markets could swiftly close the green investment gap ignores underlying financing structures. In Europe, the areas with the biggest funding needs rely on bank loans rather than financial markets and the recent banking turmoil is unlikely to change this. The reliance on banks will not abate any time soon as EU governments are dragging their heels on completing the capital markets union despite repeated promises. Since banks will largely finance the European green deal, the EU should step up its efforts to green the banking system and systematically make climate risks a core element of banking supervision, prudential regulation, and monetary policy.
EU banks have so far weathered the storm caused by the pandemic, the war in Ukraine and sharp interest rate hikes. However, the failure of Credit Suisse and three US tech banks underlines how quickly investor and creditor trust can erode, prompting regulators to intervene and governments to provide public support. While swift and decisive action in the US and Switzerland prevented a systemic bank crisis, the EU will struggle to preserve financial stability if things go badly wrong. To boost confidence in its banking system, it is therefore high time for the EU to push ahead with banking union. To get its act together, the EU should 1) improve banks’ resilience by adopting strict prudential regulation instead of creating new vulnerabilities, 2) make the crisis management framework more credible to ensure that banks can fail without using taxpayers’ money, and 3) put in place European backstops to bank resolution and deposit insurance to withstand a systemic crisis.
Financial supervisory authorities in the EU are not sufficiently independent of political and economic influence. As the financial scandal surrounding Wirecard shows, this entails the risks of conflicts of interest that undermine the integrity of the European financial system and harm the goal of an integrated banking and capital markets union. That is why in his Policy Brief, Sebastian Mack proposes European-wide requirements for the independence, accountability and transparency of national financial regulators. Ten years after the establishment of the European System of Financial Supervision, it is high time to regulate the governance of national supervisory authorities across Europe and thereby strengthen financial supervision throughout the EU.
The challenges of enforcing sanctions against Russian oligarchs have brought the problem of financial secrecy to the fore. Governments in the EU lack the information necessary to identify, locate and freeze the assets of Vladimir Putin‘s entourage. What is missing is an EU-wide asset register that would not only shed light on the wealth of sanctioned individuals, but also help in Europe‘s fight against financial crime. This policy brief outlines the steps needed to build an interconnected EU asset register based on existing data collection requirements. Such a register could be practically implemented in the context of the ongoing overhaul of the EU anti-money laundering legislation.
The European audit market has been broken for far too long. After glaring audit failures in the recent past, the legislation is once more under review. Fixing the persistent shortcomings will require serious reforms in three areas. To increase competition and rein in the dominant position of the Big Four, joint audits including at least one challenger firm should become mandatory. Auditors should be prohibited from providing their audit clients with consulting services to eliminate conflicts of interest. And the European Securities and Markets Authority (ESMA) should directly supervise the biggest audit firms to ensure effective oversight. With bold and binding tools, European decision-makers can finish the job and finally turn the EU audit market around.