Vice President, Analistas Financieros Internacionales Road to CMU: developments in financing since the crisis Ángel Berges
Vice President, Analistas Financieros Internacionales
Road to CMU: developments in
financing since the crisis
Ángel Berges
1 Financial structures and developments
during the crisis: Europe versus the US
2
1. Financial structures and developments during the crisis: Europe versus the US
Higher weight of bank lending in Europe relative to capital markets in US
Source: Afi, Afme. 3
Euro Area funding model (% of GDP) US funding model (% of GDP)
Increased importance of external financing relative to own funds in European companies
Source: Afi, Afme4
1. Financial structures and developments during the crisis: Europe versus the US
The banking sector is larger in Europe than other advanced economies
Source: Afi, IMF.5
Size of the banking sector and capital markets in EU
and other jurisdictions (% of GDP)
1. Financial structures and developments during the crisis: Europe versus the US
On top of these structural elements, bank lending has been on a downward path…
Source: Afi, Afme6
1. Financial structures and developments during the crisis: Europe versus the US
…especially in those economies where recourse to alternative sources of financing is limited
Source: Afi, ECB.7
1. Financial structures and developments during the crisis: Europe versus the US
Evolution of GDP growth in US and Eurozone (2007=100)
90,0
92,0
94,0
96,0
98,0
100,0
102,0
104,0
106,0
108,0
110,0
2007 2008 2009 2010 2011 2012 2013 2014
US Euro zone
Does it matter for economic recovery?
Source: Afi, Eurostat 8
1. Financial structures and developments during crisis: Europe versus the US
2 Capital Market Union and SMEs:
chicken and egg problem
9
2. Capital Market Union and SMEs: chicken and egg problem
A business structure dominated by SMEs…
SMEs and large enterprises: number of enterprises and employment by firm size in Europe and Spain
Micro Small Medium SMEs Large Total
Number of enterprises
Spain number 2.984.727 107.784 18.011 3.110.522 3.839 3.114.361
Spain % 95,8 3,5 0,6 99,9 0,1 100
EU-28% 92,4 6,4 1,0 99,8 0,2 100
Source: Afi, ipyme.
Employment
Spain % 32,6 18,8 14,8 66,0 34,0 100
EU-28 % 28,6 20,7 17,4 66,6 33,4 100
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In the case of Spain, micro firms with less than
nine employees are dominant. Medium-sized
firms have very little representation.
This makes resolving the Spanish case
distinct from the German fixed income model
based on medium-sized firms.
Distribución de empleados por tamaño de empresa
(2012)
(%)
Source: DIRCE, European Commission Annual Report on SMEs in the EU 2012. 11
2. Capital Market Union and SMEs: chicken and egg problem
Distribution of employees by size of firm (2012)
…in which micro firms are the most prevalent
Weaker capital structure and difficulties to attract equity (SMEs)
SMEs’ total equity vs total liabilities (%)
Source: Afi, BACH, EVCA, Pitchbook
0
50
100
150
200
250
300
350
2007 2008 2009 2010 2011 2012 2013 2014
US total funds raised ($) EU total funds raised (€)
36,648,4
34,0 32,1 28,6
0
10
20
30
40
50
60
70
80
90
100
DE ES FR IT PT
Total Equity Total Liabilities
Private equity funds raised (billion $/€)
Dificultades para obtener capital:
2. Capital Market Union and SMEs: chicken and egg problem
12
13
The weight of SMEs in European stock markets
2. Capital Market Union and SMEs: chicken and egg problem
3 Barriers to overcome
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i. Create a genuine Capital Markets Union
Objectives of CMU
1. Improve access to financing for all businesses across Europe (in
particular SMEs) and investment projects such as infrastructure;
2. Increase and diversify the sources of funding from investors in
the EU and across the globe; and
3. Make markets work more effectively and efficiently, linking
investors to those who need funding at lower cost, both within
Member States and cross-border. 3,5x2,6x 2,3x 2,5x
1,8x
3,9x
0,9x 2,8x 2,8x
2,9x
2,3x
4,1x
0,0x
1,0x
2,0x
3,0x
4,0x
5,0x
6,0x
7,0x
8,0x
US EU Spain France Germany UK
Fixed income + Capitalisation Banking Assets
Size of capital markets as a proportion of GDP
Source: Afi, FMI
3. Barriers to overcome
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b. Eliminate fiscal bias towards debt financing
Effective average tax rate (EATR) as a percentage of debt and equity
financed new corporate investment
Source: Afi, ESMA, EC
• The favourable treatment of debt has created a bias
towards debt financing.
• Of the 23 million SMEs in the EU, only about 11.000 are
listed on a stock exchange or traded on exchanges or
Multilateral Trading Facilities (MTFs) (EC, Economic
Analysis accompanying the CMU Action plan)
• On average, at the EU level in 2014, the cost of capital for
equity was around 45% higher than the cost of capital for
debt due to taxation (EC, Economic Analysis
accompanying the CMU Action plan)
3. Barriers to overcome
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c. Harmonise the treatment of insolvencies
Harmonizing insolvency procedures would:
Reduce fragmentation amongst MS and help to lower barriers to cross-border investment
Lower the costs to investors of having to analyse different national insolvency laws
Guarantee and ensure the effectiveness and quality of insolvency proceedings.
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
IR BE FI NO DK UK NE GE SP US IT FR LU PT SW CR LI PO GR
Time (years) to resolve insolvency Recovery rate (%)
0
10
20
30
40
50
60
70
80
90
100
NO FI BE NEUK DK IR GE US FR SW PT SP CR IT PO LU LI GR
Source: Afi, World Bank
3. Barriers to overcome
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Towards aCapital Markets Union
Antonio J. Zoido
Chairman and CEO
- 2 -
2015
Towards a Capital Markets Union
November 5th
A LONG PROCESS
THE CAPITAL MARKETS UNION
- 3 -
2015
Towards a Capital Markets Union
November 5th
EU US
Capital markets structure - EU vs. US (end December 2013)
Source: ECMI Statistical Package (2014)
400%
300%
200%
100%
0%
GD
P (
%)
Financial institutions debt securities
Corporate debt securities
Government debt securities
Public equity markets
- 4 -
2015
Towards a Capital Markets Union
November 5th
NL DK UK SE ES FR IT PT DE PL
Stock market capitalisation and outstanding debt securities(end December 2013)
400%
300%
200%
100%
0%
GD
P (
%)
Debt securities
Stock market
Source: ECMI Statistical Package (2014)
- 5 -
2015
Towards a Capital Markets Union
November 5th
EU US
Total number and average size of mutual funds in the
EU and the US (Q3, 2014)*
2,000
1,500
1,000
500
0%
Siz
e(E
UR
mn
)
Average size (lhs)
Number funds (rhs)
* Funds of funds are not included, except for FR, DE, IT, LU.
Source: EFAMA, Intenational Statistical Release (2015)
- 6 -
2015
Towards a Capital Markets Union
November 5th
Composition of the financial portfolios of EU and US households(%, end 2014)
Data Sources: EU and Us anual accounts data released
by Eurostat and the US Federal Reserve
US
EU
0% 5% 10% 15% 20% 25% 30% 35% 40%
Other financial
assets
Debt securities
Investment fund
shares / units
Shares and other
equity
Currency and
deposits
Insurances and
pension schemes
Note: This and more in-depth data analysis is included in a forthcoming report of a Group of experts put together by CEPS
to issue recommendations on how to créate a European market for capital
- 7 -
2015
Towards a Capital Markets Union
November 5th
Challenges facing the Capital Markets Union
• Regulation
• Supervision
• Market-related issues
Accounting standards
Structure, functioning
Stock exchanges
Some particular cases
- 8 -
2015
Towards a Capital Markets Union
November 5th
Plaza de la Lealtad, 1 · 28014 Madrid
Jung LichtenbergerDeputy Head of Capital Markets Union Unit
Directorate General for Financial Stability, Financial Services and Capital Markets Union (FISMA)
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EU needs more investmentActual and potential GDP in the EU and US
3
Bank lending is pro-cyclicalEU bank lending to business (2008-2014)
4
CMU in an nutshell
Boostinvestment
into EU economy
More choice
Integration
5
• Stable financial system
• greater funding options cushion the impact of a contraction in bank lending
• more developed equity markets supports long-term investment
• Integrated financial system
• deeper and more liquid markets lower costs and increase competitiveness
• MS with small and large capital markets set to gain
• facilitate shock absorption within EMU (risk-sharing)
Stronger capital markets support investment, growth & jobs
6
Agenda
CMU is a key priority for the Commission
Targeted actions across six policy areas
Next steps
7
Capital markets link savings to growth
Need funds to grow
Start-ups & small businesses
Mid-caps & large companies
Infrastructure projects
Provide funds
Institutional investors (insurance, pension funds and investment funds)
Retail investors
Banks
Financial integration & stability
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CMU launched on 30 September
CMU Action Plan
• CMU Action Plan & timetable
• Economic analysis
• Summary of CMU Green Paper consultation replies
Delivering the CMU: first set of actions
•Bank lending: securitisation and bank capital requirements
• Insurance: Solvency 2 amendment for infrastructure finance
•Consultations:• Covered bonds
• EuVECA (venture capital) Regulation
• Call for Evidence on impact of recent financial reform
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• A comprehensive approach spanning the diverse, multipleissues raised in the consultation: no single lever will work.
• CMU implies a structural change in EU financial system: initiateirreversible processes to move towards CMU for EU-28by 2019;
• Early action to build momentum and heavy investment indeveloping sound bases for longer-term work;
• Better Regulation: Explore different options before decidingon form: (no action, support industry, supervisoryconvergence, better enforcement, opt-in EU regimes,harmonisation).
Our approach
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Actions in 6 key areas
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1. Finance for start-ups & SMEs
•Crowdfunding report
•Business growth funds
•Private placements
•Loan-originating funds
Innovative corporate financing
•EuVECA/EuSEF review
•EU VC fund-of-funds
•Study on tax incentives for VC and business angelsVenture capital
•Feedback on declined credit applications by banks
•Support & advice for SMEs seeking market finance
•Develop & support EU information systems (match-making)
SME finance
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2. Selling company bonds & shares
•Legislative proposal to amend Prospectus Directive
Simple and cheaper
prospectuses
•SME Growth Markets;
•Voluntary accounting standards for SMEs based on IFRS.
Public trading of small
businesses
•Review drivers of corporate bond liquidity, including voluntary standardisation;
•Common Consolidated Corporate Tax Base (CCCTB) proposal to tackle debt-equity tax bias.
Corporate financing
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3. Infrastructure, sustainability & regulatory review
•Solvency 2 calibrations for infrastructure & ELTIFs
•CRR review ongoing to provide evidence-base for further work;
Infrastructure investment
•Explore link between finance and sustainability, notably by monitoring developments on green bonds
Sustainable investment
•EU legislation to strike the right balance between risk & growth;
•Call for Evidence on cumulative impact of financial legislation.
Regulation supportive of investment
14
4. Using markets to support bank loans
•STS proposal on 30 September
•Review CRR and Solvency 2 calibrations Securitisation
•Consultation
•Covered bonds for SME loans
Covered bonds
•Alleviate regulatory burden for credit unions
Local finance networks
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5. More investor opportunities
•Assess retail investment market and whether it is delivering the right outcomes for small investors
•GP on cross-border Retail Financial Services and InsuranceBetter deals
•Build an EU market for personal pensionsMore retirement
savings
•Assess case for Solvency 2 review for private equity and debt (as part of Solvency 2 review)Insurance
• Eliminate barriers to cross-border distribution of investment funds across the EU
Investment funds
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6(1). Facilitating cross-border investing
• Post-trade infrastructure and collateral markets
• Securities ownership in cross-border situations
Market infrastructure
• Tackle unjustified national barriers to free movement of capital
National barriers
• Drawing on 2014 Recommendation, prepare legislative initaive on business insolvency incl. early restructuring and 2nd chance
Insolvency proceedings
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6(2). Facilitating cross-border investing
•Withholding tax refund procedures
•Discriminatory tax on pension & insurance (dividends, interest, real estate income and capital gains)
Cross-border tax barriers
•Convergence of supervisory outcomes (single rulebook);
•Capacity building through the Commission's Structural Reform Support Service (SRSS)
•White Paper on ESA funding and governance;
•Monitoring of macroprudential risks (forthcoming ESRB review).
Stability and convergence
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Next steps
•Discussion of priorities and implementation
•ECOFIN Council: conclusions by year-end
•EP (ECON): regular reporting & specific CMU actions
Co-legislators
•Launch work on delivery of commitments
•Individual projects with key stakeholdersStakeholders
•Regular reporting
•Mid-term review in 2017
Monitoring progress
Criteria for simple, transparent and comparable securitisation
Seminar: Towards a Capital Markets Union
Madrid, 5 November 2015
Tim Pinkowski
IOSCO General Secretariat
disclaimer
• The views expressed in this presentation are my own and not necessarily those of IOSCO or its members.
2
Overview
BCBS-IOSCO Task Force on Securitisation Markets: Background & objective
STC Criteria
Asset Risk
Structural Risk
Fiduciary and Servicer Risk
Next steps
BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS
OBJECTIVE
• A review of securitisation markets
• Identification of factors hindering the development of sustainable securitisation markets
• Developing criteria to identify and assist in the development by the financial industry of simple and transparent securitisation structures
BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS
TFSM developed criteria
To identify and assist in the development by the financial industry of simple, transparent and comparable securitisations
To assist investors with their due diligence on securitisations (not a substitute for due diligence)
modular approach: interested parties may complement these criteria with additional and/or more detailed criteria based on specific needs and applications
STC Criteria
Draft criteria have been classified under three categories
asset risk generic criteria relating to the understanding of the asset pool
structural risk: transparency around the securitisation structure
fiduciary risk: governance of key parties to the securitisation process
STC Criteria
Asset Risk
Nature of the assets
Asset performance history
Payment status
Consistency of underwriting
Asset selection and transfer
Initial and ongoing data
BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS
Structural Risk
Redemption cash flows
Currency and interest rate asset and liability mismatches
Payment priorities and observability
Voting and enforcement rights
Documentation disclosure and legal review
Alignment of interests
BCBS-IOSCO TASK FORCE ON SECURITISATION MARKETS
Fiduciary and Servicer Risk
Fiduciary and contractual responsibilities
Transparency to investors
Next steps
The BCBS IOSCO TFSM has started work to
develop criteria for short-term securitisations
engage with market participants to encourage industry initiatives to improve the standardisation of securitisations documentation
Reports
Criteria for simple, transparent and comparable securitisation (2015)
Global Developments in Securitisation Regulation (2012)
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD394.pdf
Peer Review of Implementation of Incentive Alignment Recommendations for Securitisation (2015)
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD504.pdf
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD494.pdf
Thank you
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