Capital and Investment Union: The Great Debate
Initial Opposition Materializes
The Capital and Investment Union (CUI) debate is heating up, and it's becoming apparent that some of the EU Commission's proposals are facing significant opposition, especially when it comes to centralizing supervision.
By Mike D.
As the EU legislative package for the CUI takes shape, resistance is gathering against some of its key components. This was evident at a financial markets conference hosted by the Association for Financial Markets in Europe (AFME) in Frankfurt at the end of May.
During his speech at the conference, the Governor of the Belgian National Bank, Pierre Wunsch, took issue with the idea that large sums of private customer deposits on bank accounts are "idle." Wunsch argued that "banks use these deposits to funnel them into the real economy.” He also noted that "the availability of financial means for Small and Medium-sized Enterprises (SMEs) is not a significant issue.”
Wunsch also addressed the topic of the 27 central depositories in the EU and pointed out that integration is already quite advanced, with three dominant players. He is not convinced that establishing a single supervisory authority for central depositories is an urgent matter at the moment. National interests should be considered in the CUI negotiations, and a situation where every disagreement is perceived as resistance should be avoided.
Wunsch was not the only speaker at the Frankfurt conference to question the formulations in the EU Commission's draft that portray bank deposits as unproductive.
Overall, there is concern that the project of a banking union may receive less attention in the future, as it is now part of the broader CUI package. "The CUI has overshadowed the banking union," noted one conference participant.
Reservations about centralization
A stronger centralization of supervision is a recurring theme in the CUI strategy presented in March. In their response to the first consultation, the Association of the Luxembourg Fund Industry (ALFI) expresses concerns about such moves. "We advocate for regulatory convergence while maintaining national expertise through a decentralized supervisory model," states the interest group. National authorities should maintain their flexibility and adaptability when managing asset management regulations. A centralized supervisory authority would likely increase complexity and costs without removing existing barriers to fund distribution. Changes to the current supervisory framework would not result in additional savings for Europe's capital markets and would be a distraction.
The European Fund and Asset Management Association (Efama) also voices its disapproval of granting the European Securities and Markets Authority (ESMA) direct supervisory powers over large asset managers. While it supports greater supervisory convergence and the sharing of supervisory data between authorities, an overly centralized approach isn't desirable. Centralization wouldn't boost private investor participation in capital markets and would have negative implications for national authorities in terms of market entry, flexibility, and adaptability. Efama also fears that centralization could divert resources from measures that could truly make a difference, given the contentious nature of the issue.
Representatives of the credit industry argued at the AFME conference that banks ought to remain a cornerstone of the capital markets union, and the completion of the initiatives on crisis management and deposit insurance (CDMI) and European deposit insurance scheme (EDIS) is critical. Rather than pursuing a cultural shift that would develop the EU system towards a market-oriented system like in the US, the EU should stick to its traditional bank lending model. The revitalization of the securitization market could help ease bank balance sheets. EU proposals for updating the securitization regulation and adjusting capital requirements for securitizations are expected in the week starting June 16.
Insights:
- While the EU Commission is advocating for a stronger centralization of supervision within the CUI, some industry groups are cautious about this approach.
- One concern is that a centralized supervisory authority might unnecessarily increase costs and complexity while failing to eliminate existing barriers to fund distribution.
- Direct supervision by ESMA over major asset managers is also contentious, as it may not lead to increased private investor participation and could divert resources from more impactful measures.
- The credit industry argues that banks remain essential to the capital markets union, and completing initiatives on crisis management and deposit insurance (CDMI and EDIS) is vital. A focus on revitalizing the securitization market could help ease bank balance sheets.
- Achieving full harmonization is challenging due to national discretions and remaining provisions in directives that require transposition into national laws.
- In the Capital and Investment Union (CUI) debate, some industry groups, such as the Association of the Luxembourg Fund Industry (ALFI) and the European Fund and Asset Management Association (Efama), have expressed reservations about the EU Commission's proposals for a stronger centralization of supervision.
- These groups advocate for regulatory convergence while maintaining national expertise through a decentralized supervisory model, arguing that a centralized authority would likely increase complexity and costs without eliminating existing barriers to fund distribution.
- Additionally, both ALFI and Efama disapprove of granting the European Securities and Markets Authority (ESMA) direct supervisory powers over large asset managers, stating that centralization could have negative implications for national authorities in terms of market entry, flexibility, and adaptability.
