Luis de Guindos: Europe's role in the global financial system
Keynote speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the
SUERF/Netherlands Bank Conference "Forging a new future between the UK and the EU",
Amsterdam, 8 January 2020.
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It is my pleasure to deliver the keynote speech at this year's SUERF/DNB conference.
The title of this conference is very apt. Brexit will certainly require a new future to be forged
between the United Kingdom and the EU. The United Kingdom's departure has important
implications for the EU financial system, most notably for capital markets. So we need to give
serious thought to optimally shaping the future relationship between our financial sectors in the
awareness that London, though likely to remain an important global financial centre, will become
less integrated with EU markets and firms. We will also need to step up our efforts to further
develop the EU's domestic capacity in capital market activities, so as to avoid a Brexit-induced
increase in financial fragmentation, while at the same time ensuring that the United Kingdom and
EU Member States do not engage in a race to the bottom on regulation.
Taking up the theme of the conference, I would first like to focus on how to forge a new future
between the United Kingdom and the EU with regard to some key financial activities. I will then
turn to the much-needed drive to strengthen the European financial system by completing the
capital markets union and banking union.
London's pre-eminence in certain key financial market segments
For decades, Europe's leading financial centre has been the City of London and, in some notable
areas, the EU's financial ecosystem has relied heavily on services provided by UK-based banks
and market infrastructures.
Derivatives clearing - a critical segment of financial markets - is a striking example. As of
December 2019, almost 90% of all over-the-counter (OTC) derivatives positions taken by euro
area institutions were cleared at UK global clearing houses.
Derivatives clearing is not the only example, however. Large investment banks operating from
London play a significant role in euro area bilateral OTC derivatives markets. In August last year,
over a quarter of uncleared OTC derivatives held by euro area institutions were sourced from the
United Kingdom. While the activities of these investment banks were considered unlikely to
create financial stability risks in a hard Brexit scenario (also thanks to the temporary measures
taken by EU and national authorities), they are still relevant to the provision of liquidity to euro
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area markets over the longer term.
UK-based investment banks are also key providers of advisory and financing services related to
securities issuance, M&A activity and syndicated lending to euro area clients. They play an active
role in debt and equity issuance for euro area non-financial corporations, including book running
and underwriting services. Between 2012 and 2018, almost half of all debt and equity issuance
for euro area non-financial corporations was carried out by global banks serving our market from
London. Our reliance on London also stems from the fact that, in some cases, the City
represents a gateway to global financial markets for euro area financial and non-financial firms,
allowing them to tap into global capital and liquidity pools. In other areas, however, reliance on
London is quite limited. For instance, UK-domiciled banks play a marginal role in direct lending to
euro area households and non-financial companies.
Had it not been for Brexit, certain global and regional trends might even have led to an increase in
the EU's reliance on the City of London as a centre for market-based finance. Indeed, the
balance between banks and non-bank financial institutions in the EU has been evolving in recent
years: although still very much bank-based, our economy is increasingly financed by non-bank
institutions. In the euro area, total assets held by non-banks have almost doubled over the last
ten years, growing from €23 trillion in 2008 to €45 trillion in June 2019. Non-banks currently
account for around 55% of the euro area financial sector. Their fast growth reflects their
expanding role in financing the euro area real economy. Whereas in 2008 non-banks accounted
for 14% of the euro area financial sector's loans to non-financial corporations, that share roughly
doubled in a decade. Non-banks provide a steady net flow of financing to non-financial
corporations through the purchase of debt securities.
Regulatory decisions and economic drivers will affect the status quo
These examples give a sense of the level of integration between UK and continental financial
markets, in particular for certain complex and sophisticated financial services linked to
derivatives markets and investment banking activities. However, Brexit will change this status
quo and a degree of decoupling is likely.
It is difficult to make firm predictions about the extent to which our two financial systems may drift
apart or remain integrated. The contours of the future EU-UK relationship in financial services are
still uncertain, and the economic drivers and regulatory choices which could reshape this
relationship will probably only be felt over time. The EU will need to balance the benefits of
continued integration with the UK financial system against potential risks to financial stability,
consumer and investor protection, the level playing field and the integrity of the Single Market. As I
have said in the past, this path will not be easy for either side of the Channel, and the risks linked
to regulatory divergence and a potential race to the bottom should not be taken lightly.
Allow me to briefly discuss the regulatory dimension of this question. A possible scenario is that
the United Kingdom will not seek to remain a member of the EU Single Market once it leaves the
EU. This means moving away from a fully-integrated relationship underpinned by the EU's single
rulebook and single passport for financial services, and relying instead on the EU's equivalence
framework for third countries. For some types of financial activities, this framework allows
financial service providers from third countries to continue to serve EU clients provided a number
of strict conditions are met.
For example, in the area of central clearing - which I touched upon earlier - cross-border market
access is widespread: 15 jurisdictions are considered equivalent by the EU and 33 third-country
central counterparties (CCPs) are recognised by the European Securities and Markets Authority
(ESMA). At the same time, given the euro area's reliance on UK CCPs, strong safeguards must
be put in place to preserve financial stability and a level playing field. In this respect, I am very
pleased that EU legislators have adopted a new supervisory framework for CCPs in the
European Market Infrastructure Regulation (EMIR 2). This framework requires third-country
CCPs which are critical for the EU to meet EU prudential requirements under ESMA's
supervision, with the involvement of the relevant EU central banks. If UK CCPs are to continue to
provide euro clearing services on a systemic scale under the equivalence framework, they
should be subject to the rigorous application of these safeguards.
In central clearing or other areas such as trading or listing, the extent of continued market access
will depend on whether or not a decision is taken to grant equivalence to the United Kingdom.
These decisions are beyond the purview of the ECB, and it is not my place to comment on them.
Suffice to say that there is no automatic right to equivalence.
For other types of financial activities, no specific regime for accessing EU markets has been
established. This is not unusual: most if not all countries place some restrictions on the types of
financial services that can be provided across their borders. There may be good reasons for
these restrictions, such as consumer protection or financial stability considerations. In the case
of the EU, certain bank lending and deposit-taking activities are not covered by the so-called
third-country regimes and so will no longer be able to be provided from the United Kingdom, but
will need to be provided from within the EU. This - together with the fact that equivalence cannot
be taken for granted - is why many banks have chosen to relocate activities to the EU27, and
have been engaged in very detailed discussions with the ECB and other authorities to obtain
agreement on their plans. The ECB expects banks to build up their capabilities in EU27 countries
and to implement the agreed relocation plans within the previously agreed timelines.
The risks of financial fragmentation
Regulatory drivers - and in particular the end of passporting rights for certain UK-based activities
- are already having an effect on the geography of financial centres in the euro area. According to
preliminary evidence, a small number of financial hubs appear to be emerging as a result of the
relocation - or plans for relocation - of certain activities. Most incoming banks have indicated
Germany, Ireland, the Netherlands or France as their new main location in the euro area.
This pattern also seems to apply to the relocation of activities beyond banking. Public statements
and market intelligence suggest that a sizeable fraction of asset management firms and
insurance companies that are relocating activities from the United Kingdom as a result of Brexit
have moved to either Ireland or Luxembourg. And speaking here in Amsterdam, I should note that
the Netherlands is attracting a substantial amount of trading platforms, exchanges and fintech
companies.
The persistence of such dynamics, and the emergence of a clearly multi-centric euro area
financial system, could raise a number of challenges. In particular, without further progress on
banking and capital markets union, a more fragmented financial structure could affect the ability
of investors and companies from a country experiencing a negative shock to access investment
and funding opportunities in unaffected countries (private risk-sharing). It could also create
regulatory and supervisory challenges: domestic capital markets within the EU are currently
subject to national rules and supervision; the differences in regimes could further inhibit the
integration of markets and perhaps incentivise regulatory arbitrage.
Brexit and the need for renewed momentum on the capital markets union and banking
union
Indeed, from a global standpoint, European capital markets are too small and fragmented. The
goal of the capital markets union (or CMU) is to develop an ecosystem that will allow the
development of strong European financial markets and intermediaries which are able to compete
internationally. This requires designing policies to support the development of markets' size and
scope, removing barriers between EU capital markets, expanding sources of funding for
companies, and broadening the role of the non-bank financial sector. Ultimately, a well-developed
CMU will increase private risk-sharing, promote financial stability and boost economic growth.
Starting in 2015, the European Commission launched a series of initiatives to stimulate the
development and integration of EU capital markets. On market development, the Commission
adopted a set of harmonised rules on securitisation and published its fintech action plan in 2018.
Initiatives on market integration included the review of the European Supervisory Agencies and
the covered bond legislative package. The former aimed to make our system of financial
supervision more efficient and effective and also gave the European Banking Authority a
coordinating role in the areas of anti-money laundering and terrorist financing. The latter should
foster the development of covered bonds by creating a harmonised EU framework, providing a
source of long-term financing for banks and supporting the real economy across the EU.
Despite the efforts of policymakers and market participants, retail investors are far from having
embraced investing in capital markets. While the full impact on the real economy may take time
to materialise, it is concerning that the initial ambitions of the plan launched by the European
Commission towards the development of a CMU were significantly lowered to enable
colegislators to reach an agreement.
So there is still much to be done on the CMU project and Brexit makes these issues even more
pressing. Let me highlight a few initiatives. First, the European Commission signalled that it
would make CMU a centrepiece of the forthcoming legislative agenda and has already set up a
high-level forum, composed of experts from different industry sectors, which has started work on
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proposals for the next CMU Action Plan.
Second, a high-level working group created by Germany, the Netherlands and France published
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a proposal to relaunch CMU in 2019.
This proposal includes recommendations for generating long-term savings opportunities,
developing equity markets, enhancing cross-border financial flows, and developing debt, credit
and foreign exchange financing tools with a view to increasing the international role of the euro.
Last but not least, there have been industry-led initiatives such as the CEPS-ECMI task force on
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rebranding CMU, which put forward a market finance action plan.
These initiatives provide valuable input for the CMU agenda. Looking ahead, I see two areas
where progress is particularly needed.
First, capital markets remain subject to national rules and supervision. This hampers the
crossborder provision of services. Further harmonisation, for instance in the area of insolvency and
taxation regimes, is needed to foster integration in the euro area.
Second, if the EU27 financial markets deepen, diversify and expand across borders, there would
be a clear flipside: these developments would need to be accompanied by sufficient oversight
and regulatory tools to avoid regulatory arbitrage or the build-up of risks in certain parts of the
system. In particular, ensuring the resilience of individual institutions is not enough to guarantee
the stability of the system as a whole: a macroprudential framework for non-bank financial
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institutions is necessary for identifying and addressing risks at the system level.
The links between the capital markets union and the banking union
Revitalising the CMU agenda will also bring benefits for the completion of the banking union, as
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banks and markets complement each other in financing the real economy.
We need to ensure that this reinforcing loop is strengthened over the coming years. I would like
to highlight three key priorities for the banking union.
First, it is important to operationalise a credible common backstop to the Single Resolution Fund
to provide additional confidence in the bank resolution framework. The policy work on this
backstop is at a very advanced stage.
Second, in order to close potential liquidity gaps that may still hinder efficient resolution, the
outstanding issue of liquidity in resolution needs to be addressed. Progress is needed in the
discussions on potential solutions in order to place the banking union on a par with other major
jurisdictions, like the United States and the United Kingdom.
Third, it is crucial to establish a European deposit insurance scheme (or EDIS) to provide
uniform protection to depositors within the banking union, regardless of their bank's location, and
to help reduce the sovereign-bank nexus. More efforts are still needed in this regard. Hopefully
2020 will be the year in which the political deadlock on EDIS will be resolved and a clear roadmap
adopted, reflecting timelines and conditions for the various stages of EDIS.
Conclusion
Let me conclude. Today I have explained why Brexit underscores the need to renew our ambition
on CMU and complete the work on banking union. The unifying theme of the priorities that I have
outlined today is basically risk-taking and risk-sharing among private agents. In a nutshell, both
the capital markets union and the banking union provide a framework that encourages innovation
and integration. Further work on these agendas will enhance the attractiveness of the EU capital
markets on the global stage beyond Brexit.
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]See also ECB (2019), Financial Stability Review, May.
2
See European Commission (2019), Press release on High-Level Forum on capital markets union, 10 October.
3
See The Next CMU High-Level Group (2019), Savings and Sustainable Investment Union, October.
4
See CEPS and ECMI (2019), Rebranding Capital Markets Union.
5
See Pires, F. (2019), Non-banks in the EU: ensuring a smooth transition to a Capital Markets Union, SUERF
Policy Note, No 103.
6
See Constâncio, V. (2017), "Synergies between banking union and capital markets union", speech at the joint
conference of the European Commission and European Central Bank on European Financial Integration,
Brussels,19 May.