Yves Mersch: For a European capital markets union - securing stability,
overcoming fragmentation
Closing keynote speech by Mr Yves Mersch, Member of the Executive Board of the
European Central Bank, at the Zeit Konferenz "Banken & Wirtschaft", Chamber of Commerce
and Industry, Frankfurt am Main, 10 September 2014.
* * *
Dr Esser (Managing Director, ZEIT Verlagsgruppe),
Dr Raettig (Vice-President, Chamber of Commerce and Industry, Frankfurt am Main),
Ladies and Gentlemen,
I would first like to thank you for inviting me to deliver the closing speech of this high-calibre
conference.
I would do an injustice to the participants in the previous two panel discussions if I attempted
to sum up the day's deliberations. Instead, I'd like to conclude by linking together financial
market policy, which has already been discussed at length today, our monetary policy and
the overall functioning of Europe's Economic and Monetary Union.
A common currency in a union of states such as the European Union can only work in the
long term if financial market policy, economic policy and fiscal policy interact at European
level and in the Member States within the framework of common rules. In this way, the
independent central bank is given the opportunity to fulfil its monetary policy mandate.
Unfortunately we are quite some distance from this ideal condition.
The crisis has shown us just how much the various policies affect each other. It has shown
how easily bad budgetary management, excesses in the financial markets and a steady loss
of competitiveness can reinforce each other.
I am convinced that Europe has understood this. But I'm not sure if it is ready to draw all
necessary conclusions.
Without doubt, some changes for the better have taken place since the beginning of the
crisis: most of the Member States and in particular the programme countries have made
significant efforts to put their budgets in order and improve their competitiveness. With the
banking union we are now taking a decisive step at European level. It will increase the
stability of the banking system in the euro area and protect taxpayers in the future more
effectively against expensive bank bailouts by linking risk and liability more closely.
However, the economic recovery is still some way off: in the last quarter, the economy
stagnated in the euro area. Unemployment is still at 11.5%. Prices in August rose by only
0.3%, but inflation expectations are anchored.
All in all, these figures should give us cause for concern. They point out that Europe is still
not out of danger. The patient is in a sense still poorly and unfortunately relapses cannot be
ruled out.
Financial market policy, fiscal policy and economic policy are still insufficiently harmonised,
because all too often the political courage is lacking to push through the necessary but
sometimes unpopular measures in the face of resistance. I am convinced that this is an
important reason for the current economic weakness. As a result, the ECB's monetary policy
cannot optimally fulfil its mandate. To change this, we need to further improve the functioning
of Economic and Monetary Union. In other words, we need to draw the right conclusions
from the crisis.
All three policies mentioned - financial market policy, fiscal policy and economic policy - are
essential to this process. Ambitious structural reforms are just as important as good
housekeeping. But as we are talking about financial market policy today, I want to focus on
the completion of Europe's internal market for capital. We should not stop at the banking
union. It is an important step. But the current situation in the euro area demands that we
consider even more seriously how financing channels, especially for small and medium-sized
enterprises, may be opened up beyond the banking system. This would also benefit the
implementation of our monetary policy. That's why today I wish to speak out in favour of
developing the banking union into a comprehensive capital markets union.
Monetary policy in times of uncertainty and fragmentation
A capital markets union would be an important step towards a better allocation of capital in
the euro area and thus towards higher growth and employment in Europe. To understand
how such a move could support the recovery in the euro area, it is advisable, however, to
begin by considering our own monetary policy.
The current economic climate is unquestionably making monetary policy action very difficult.
Low growth, high unemployment and very low inflation rates call for a very accommodative
monetary policy in order to ensure price stability over the medium term. The ECB has been
meeting this demand for quite some time.
I understand why investors in this country, mindful of their savings accounts, are viewing this
policy critically. But it is true for savers as well that too low an inflation level for too long
would hold back economic development in the euro area and thus the return on savings.
In addition, the Treaty requires the ECB to maintain price stability in the euro area - and this
applies in both directions: the people of the euro area should be protected against any spurt
in inflation and against deflation.
Over ten years ago the ECB defined price stability as an annual inflation rate of below, but
close to, 2% in the medium term. For this year, however, we can expect price increases of
only 0.6%, for 2015 only 1.1% and for 2016 only 1.4%. This clearly shows why our current
very accommodative monetary policy stance is not only economically appropriate, but also a
necessary measure to fulfil our treaty obligation. The Governing Council is unanimous on this
point.
At the heart of this accommodative strategy is undoubtedly the fact that the ECB has steadily
cut the interest rate on the main refinancing operations to its lowest possible point in recent
years. However, the still existing functional deficits of the financial markets are hindering an
optimal transmission of the monetary policy signals coming from this very low interest rate.
Small and medium-sized enterprises in particular still aren't feeling enough of the monetary
policy accommodation. We call this an impaired transmission mechanism.
That's why the Governing Council unanimously adopted in June a series of measures which
will improve the transmission of our monetary policy: first, we decided to continue to conduct
our main refinancing operations as fixed-rate tender procedures with full allotment for as long
as necessary, and at least until December 2016. Banks will therefore receive as much
liquidity as they need as long as they can offer adequate collateral. Second, we have
reduced the interest rate on the deposit facility to below zero for the first time and cut it
further last week.
By the way, this is not to punish the banks, as I have often read. Rather, we are giving them
an incentive not to park liquidity at the central bank, but to pass it on in a productive way to
the real economy. In an environment in which it is already difficult for businesses to gain
access to capital for their own investments, it is important that banks also provide sufficient
funds for profitable projects.
Third, we have decided, within a framework of eight targeted longer-term refinancing
operations, to make available long-term liquidity to banks for a period up to 2018 - in
proportion to their credit volume relative to the real economy. Thus, banks are encouraged to
lend to enterprises in the euro area. At the same time, the uncertainty about the liquidity
situation of banks is reduced, so that banks can increasingly lend each other money again,
even across the borders of the Member States.
The focus of this instrument on the real economy is particularly illustrated by the fact that not
only in the first step is the existing loan portfolio crucial for the allocation of liquidity, but also
in the second step the trend over the period of the transaction will be considered. Thus,
banks are required to expand further their lending to business and households in the coming
months and years.
To reinforce these measures, the Governing Council decided last week to start purchasing
asset-backed securities (ABS) as well as covered bonds, such as Pfandbriefe, in October.
The details of these two programmes will be announced after the Council meeting in early
October.
The decision to start buying ABS is the first result of intensive preparations that are still
ongoing. For me it is clear that these measures are aimed at the monetary policy
transmission channel. They should not be equated with a broad programme of quantitative
easing (QE), nor with overtures to it.
Moreover, the economic logic of the Anglo-Saxon QE programmes cannot be applied one to
one to a bank-financed economic system like that of the euro area. Also, QE effectiveness
would be questionable in the light of the eroded yields of marketable securities. The surge in
the markets for interest-bearing securities would also strain the soundness of our balance
sheet, should we make large-scale purchases in such an environment. And it goes almost
without saying that the purchase of government bonds would raise considerable institutional,
instrumental and legal issues.
Although some are apparently pushing in this direction, this option would only be considered
on two conditions:
1. if prices stay at their current very low level for too long, and
2. strict compliance with our monetary policy mandate.
But back to the market for ABS. We have been looking at this closely for some time. We
believe that it could be an important channel for increased lending to small and
mediumsized enterprises.
Because of their size, SMEs cannot generally issue bonds. If banks now get a chance to
securitise loans to SMEs, and to sell them to other investors, a major obstacle to long-term
lending to these enterprises is removed, namely the risk of non-payment and the low liquidity
of these loans in difficult times.
A functioning ABS market can therefore make an important contribution to ensuring that our
monetary policy has an impact right across the real economy.
This brings me back to my initial hypothesis - namely that monetary policy in the euro area
may work better if other policy areas play their part. Because the dynamics of the ABS
market are significantly influenced by the regulatory framework. And there is still work to be
done here.
Let me say quite clearly: no one wants to have the complex, opaque products of the
precrisis years. Also, repackagings of the umpteenth tranche of a financial derivative should be
things of the past.
No one wants to promote a certain class of product just for its own sake. And securitised
sub-prime mortgages in the United States certainly made an inglorious contribution to the
emergence of the financial crisis. But the regulatory framework should be appropriate for the
actual risk. And in this respect there are significant differences between current and previous
securitisations and between the experiences in the US and those in Europe.
Since the start of the 2007-08 financial crisis, the default rates of European ABS were on
average between 0.6% and 1.5%. In the US over the same period, they were on average
9.3% to 18.4%. European SME ABS are even further below these default rates, at about
0.1%.
The current rules lump all ABS together and are much too conservative. They effectively
question their existence.
Under the current regulatory conditions simple, transparent ABS built on real assets face
almost as many problems as much more complex financial products. The ECB has therefore,
in cooperation with the Bank of England, made a number of proposals for a better functioning
securitisation market in the European Union. That this approach has been welcomed in
principle by the governments of the Member States is shown by the joint working paper of
the finance ministries in Berlin and Paris.
The proposals are derived in part from the quality and transparency demands that the central
banks place on ABS, which can be deposited as collateral in monetary policy operations.
And because we, as a central bank, have to protect our balance sheet, these demands have
always been very high. The ABS market is therefore a good example of how financial market
policy can benefit our monetary policy and can also contribute to the recovery in the euro
area. Thus, two goals of good financial market policy in the European context can be named:
it should be growth-friendly and it should support a successful implementation of monetary
policy. There is, of course, a third goal, which goes back to before the financial crisis:
maintaining financial stability and mitigating systemic risks.
From the banking union to the capital markets union
For the banking sector, this triad has been understood and implemented to a large extent,
although some work still remains to be done. The banking union with the Single Supervisory
Mechanism at the ECB is a milestone in the history of European integration. Our
comprehensive balance sheet valuation and our stress test will bring about greater
transparency and a healthier banking system in the euro area. The Single Resolution
Mechanism (SRM) will play its part too. It will lessen the risk that taxpayers in future will have
to foot the bill to rescue banks in trouble. In addition, it will continue to tackle the
fragmentation by sustainably reducing the interdependence of banks and governments.
At the same time, with the Single Supervisory Mechanism under construction, it's becoming
clear that the banking union is not a system closed in on itself. Rather, Europe's banking
supervision is also dependent on standards in other areas that are as uniform and
transparent as possible. Some of you may be aware of the discussion about the definition of
so-called "bad loans" in the context of the comprehensive assessment. Banking supervision,
which has to work permanently with 18 different national regulatory regimes is neither
particularly efficient, nor can it achieve the goal of comparable cross-border bank balance
sheets in the long run.
Thus, in the banking sector the question arises of how far we need to think in future beyond
the banking union in order to achieve a functioning internal market for financial services. To
answer this question, in my opinion three dimensions play a role. The first dimension is the
opening of the market itself. In this regard, we have already achieved a great deal within the
EU. The second dimension is the introduction of common uniform regulatory standards for
the internal financial market. The third dimension consists of common institutions which
enforce these regulatory standards. How much integration do we need therefore beyond the
banking system? For example, isn't it a one-sided approach only to tackle fragmentation in
respect of the banking system, and how do we handle the shadow banking system in this
context? If banking supervision is becoming European, can payment systems continue to be
monitored nationally? How do we manage to give small and medium-sized enterprises
access to capital markets beyond the banks, if those markets are fragmented and regulated
in a non-uniform way?
All these questions call for a coherent response. In my view, this response could be the
further development of the banking union and of the piecemeal regulation of the financial
system into a real capital markets union at European Union level.
Financial markets are complex and a capital markets union would affect a large number of
different areas. Allow me therefore, in conclusion, to draw attention to three points.
First, we must be certain that a stringent regulation of the banking system does not lead to a
shifting of bad risks into the non-banking sectors, without ensuring that they cannot cause
systemic damage there. Apart from the fact that the term "shadow banking" is a particularly
unfortunate one, I regard transparency as being very important here. At the same time, only
those areas should be regulated which can in fact trigger systemic risk. Innovations in the
financial sector should not be blocked per se.
Second, many financial instruments are not uniformly European and are sometimes
insufficiently comparable because of a lack of standards and a lack of transparency. I have
already mentioned the problem of ABS. The lack of proper information in this area is a
problem for SMEs' access to credit. Here and in relation to many other financial instruments,
regulatory actions can help to support the market. As I also mentioned, the joint paper by the
Bank of England and the ECB may provide a good basis here.
Third, in the field of payment systems and securities settlement there are also challenges
that a capital markets union must address: despite much progress over the past decade in
payment systems, securities settlement in the euro area remains fragmented, inefficient and
not very customer-friendly. This is not just a problem for smaller businesses, for whom
adapting to different conditions in the Member States often entails high costs, but also for the
integration and functioning of the internal market as a whole. Possible solutions include
harmonised European market infrastructures for retail and large-value payment systems and
the processing of securities transactions, as well as a coordinated and more harmonised
monitoring of critical market infrastructures. In all these areas, in which the Eurosystem is
competent, relevant initiatives were launched several years ago and have already made
significant progress. In retail payments, for example, since August 2014 there has been no
distinction between national credit transfers and direct debits of businesses and individuals,
and cross-border ones. This, and the fact that the IBAN has become a part of our daily lives,
shows how far we have progressed in the field of retail payments. The Single Euro Payments
Area, SEPA, is an important European integration project from which all businesses and
individuals in Europe benefit directly.
A comparable degree of integration would be also desirable for card payments, so that they
are not discriminated against by virtual border posts within Europe. In the long term, there
should be no "roaming charges" for European payments.
Progress has been made, but many challenges remain before the euro area can become a
"single euro payment and settlement space". These include barriers that result from
differences in market practices and standards as well as tax, accounting and legal systems in
the Member States. The removal of these barriers lies outside the competence of the
Eurosystem. Other players must also take steps to make the capital markets union a reality.
These are just three examples, but a genuine capital markets union could go much further, of
course. Differences in all these areas nurture fragmentation and could be addressed within
the capital markets union project. In addition, there is also the question of the actors which
could play a part. What functions could be performed, for instance, by the European
supervisory authorities EBA, ESMA and EIOPA, whose activities and tasks are currently
being checked in Brussels? And not least, we must identify the areas in which the EU can
take the initiative and those in which the Member States can be active.
I am very aware that these ambitious proposals cannot be implemented overnight. But the
fact that the future President of the European Commission has already taken up the idea
makes me optimistic. The challenge in the coming months will be to create a political
awareness of the enormous economic importance of this highly technical area.
Ladies and Gentlemen,
Late last year, Helmut Schmidt, the publisher of Die Zeit and former German Chancellor, said
that it's not written in any Bible that the European Union will last until the end of the
21th century in its present form. It was an expression of concern, but he hoped that he would
be wrong.
This logic also works the other way around: because the global environment in which we
operate has changed radically and because Europe is today facing quite different challenges
on the world's markets than it did 20 or 30 years ago, the Union also has to steadily adapt. It
is good that Die Zeit has today brought us together here, in the spirit of Helmut Schmidt, to
discuss these developments in financial market policy. And I am convinced that the capital
markets union could play an important part in making Europe fit for the global challenges that
the former Chancellor has been analysing for many years.
Thank you for your attention.