Financial services: The European
mysterious gap

Published on 4 September 2024

Bruegel Annual Meetings - Brussels, 4 September 2024
Speech by Francois Villeroy de Galhau, Governor of the Banque de
France

Ladies and Gentlemen,

I am delighted to be in such good company this afternoon in Brussels;
and I would like to take this opportunity to thank Bruegel very warmly for
its work and for its memo on EU financial services. This is a key topic for
the future of the European economy, and, more generally, for European
sovereignty. Yet it is marked by a mysterious and increasing gap: the
more reasons we have to go forward on financial services, the less
progress we make (I). In order to close this gap, three key courses of
action appear of particular relevance (Il).

Il. A mysterious and increasing gap

Let me start by recalling four major reasons why Europe should move
forward again.

First, Europe is still lagging behind in terms of economic dynamism. Over
the last 25 years, GDP per capita has increased by a cumulative 25% in
Europe, compared with 38% in the United States.

THE EUROPEAN ECONOMY AND FINANCE VIS-A-VIS THE UNITED STATES

GDP per capita Population, GDP and stock market capitalisation
TEs eoren hE) 2) Population b) GOP and stock market capitalisation
Cumulative change 1999-2023: 25% (EA) vs 38% (US) (aittions) (80 wations)
20
seo so

a7
15
40]
10
8
254
250 5
os
117
00

1999-2008 2009-2014 2015-2023 2023 2023 GOP (PPP) Stack market capitalisation
{overage 2019-2023)

mEuroarea United States OECD mEuropean Union = United States

Source : OECD Sources: UN, IMF, World Federation of Exchanges, Banque de France calculations

1 BRUEGEL - 4 SEPTEMBER 2024 BANQUE DE FRANCE

The European economy and finance vis-a-vis the United States

This has a primary, "Schumpeterian" cause: an innovation gap', and is
coupled with a much smaller financial firepower despite fairly similar
market size. Second, while climate change has unfortunately seemed
lately to be less of a priority in international fora, the need to address it is
becoming more pressing. Studies released this year suggest that the
damage from chronic physical risks could amount to 15% of GDP by
2050, higher than the 5% estimated so far!. Third, public debt and
deficits remain very high in some major EU countries. In this context, it is
imperative to better mobilise our abundant private savings in order to
fund the needed investments. Fourth, geopolitical tensions and political
uncertainties remain at a high level, and call for a stronger economic and
financial autonomy of Europe.

Meanwhile, we have been slow on measures to enhance European
financial services. While we have a Supervisory Union - we are
celebrating this year the 10" anniversary of this huge success! -, we
don't have a real Banking Union. Beyond supervision, how to resume
progress on the two other institutional pillars? Regarding the second
pillar, namely resolution, we should not run the risk of enshrining
disparate national procedures, and ultimately significant variations in the
recourse to external funding. Regarding the third pillar, the stalemate on
a fully-fledged European Deposit Insurance Scheme (EDIS) leaves it up
to us to find alternatives, I will come back to it later.

Furthermore, without large European banks operating at the scale of the
euro area, the Banking Union has little substance. The official side
cannot, on its own, make these banks exist, but we should be mindful of
not impeding their development. Cross-border mergers within the euro
area have been few, small and all but transformative in the past 10
years". Even in the European wholesale financial markets, where
financial integration is effective, European banks are not leaders: among
the top 10 banks generating the bulk of investment banking fees in
Europe, there are only 3 SSM banks, accounting for 29% of these fees
while US banks bring in 55% of investment banking revenues. As for the
Capital Markets Union (CMU), which has been promoted for the past ten
years, it has proved insufficiently galvanising' from a political
standpoint.

This gap between reasons for action and progress on action remains a
bit of a mystery. Jean Monnet famously predicted that Europe would be
built through crises", and Europe has not faced a financial crisis since
2012 - which is per se obviously good news. However, it would be too
heavy of a paradox if the financial security created by our efficient
Supervisory Union prevented Europe to move forward to an efficient
Banking Union. To change gears and boost investments in priority
sectors for long-term European growth and innovation, let me share
today three key and somewhat new ideas.

ll. Three new ideas to overcome the
gap
1) A Hybrid model for Deposit Guarantee

First, regarding the third pillar of the Banking Union, we have to work on
more targeted solutions than a fully-fledged EDIS. In the words of my
German colleague, Joachim Nagel," "a hybrid model would offer multiple
benefits over a centralised, purely European model". With this in mind,
we could indeed keep the current national schemes, with their
autonomous decision-making, as permitted by the Deposit Guarantee
Scheme Directive (DGSD). Therefore, fully in line with the subsidiarity
principle, we could build a European support scheme for DGSs as a
liquidity backstop when a DGS's own resources would be put under
excessive strain.

I support this idea, provided that we clarify that this European scheme
should complement DGS resources in their traditional role: interventions
to compensate covered depositors of a failed bank. Supporting other
types of DGS interventions would create issues, as they are less
harmonized and may be extended by the ongoing CMDI review.
Introducing this new common safeguard would bring considerable
benefits for financial stability in all participating Member States. And it
would pave the way for renewed discussions on waivers and cross-

border integration, which are much needed to achieve the Banking
Union.

2) Refocusing the purpose and content of
CMU

Second, regarding the CMU, the objective today is very clear: we must
unlock the funding needed for Europe's twin transformation - green and
digital - and ensure its effective allocation.

EUROPEAN INVESTMENT NEEDS, AND PRIVATE RESOURCES

Net additional annual investment European Union's net lending
needs up to 2030 (% of GDP) (% of GDP)
40% 10
8
35%
6 5,0
30% 4
28% 2 18
20% 0
2
15%
2 3,2
10%
6
05% 2

2011 2014 2017 2020 2023

aa sees CE (2024) mmm Public financial dissaving. mm Private financial saving -Total

.cus on the following sectors : building, Sources : Eurostat, Banque de France calculation

BRUEGEL - 4 SEPTEMBER 2024 BANQUE DE FRANCE

European investment needs, and private resources

Shifting to this allocation objective - rather than mere stabilisation - calls
for a rebranding as a Savings and Investments Union, to reflect this
higher purpose. And on its content, let us refocus and replace a long list
of small technical items by a short list of big items"! - green
securitisation, venture capital, supervision.

In concrete terms, the development of green securitisation could boost
banks' capacity to finance green projects by several hundred billion euro
a year; it could be accelerated by the creation of a common European
issuance platform, or even by public incentives such as a European
guarantee. As advocated by Bruegel's memotm, our green transformation
could also benefit from a clarification in the EU legal framework of
"sustainable finance" and "transition finance". When it comes to venture
capital, we should develop a more ambitious public-private partnership
with pari passu co-investments, around the European Investment Bank,
in particular to close the financing gap for scale-up companies". I also
concur with your memo to advocate a genuinely European supervision,
along the lines of the US SEC or the European SSM for banks. In this
way, ESMA could exercise single or at least joint oversight over cross-
border players that have acquired systemic importance, including certain
market infrastructures: central securities depositories and CCPs.

3) An innovative European sovereignty
strategy on payments

Payments have too often been considered as a technicality, a boring and
back office issue.

THE CURRENT PAYMENT LANDSCAPE

RETAIL PAYMENTS WHOLESALE PAYMENTS
MULTIPLE SCHEMES FINANCIAL MARKETS TOKENISATION

Domestic =F] PAYMENT SYSTEMS. ECOSYSTEM
solutions
(cards, IP*)

"IP: Instant Payment

MM CREDIT INSTITUTIONS

target

services

2 payment system Tes
(fast payment system) (wholesale central bank money) (securities)

(3) OTHER CURRENCY AREAS INFRASTRUCTURES

FPS Payment systems
(fast payment systems) (wholesale central bank money)I

2 BRUEGEL - 4 SEPTEMBER 2024 BANQUE DE FRANCE

The current payment landscape

We should definitely change our view: this field is highly innovative and
more and more competitive globally. A European strategy here could

reinvigorate Banking Union and CMU. Let me start with retail payments:
here, we need to address fragmentation and increase our strategic
autonomy. To meet this ambitious goal, the Eurosystem welcomes
private initiatives such as the European Payments Initiative (EPI), and
should focus its own efforts on the "last kilometre"; we have TIPS, but we
don't have yet harmonised front-end payment solutions. Some countries,
including Brazil and India, have met this challenge through enhanced
fast-payment systems. In the euro area, the digital euro project could
also help here.

Furthermore, in line with the G20 roadmap, we are set to reduce the
frictions, delays and costs in cross-border payments, including by
interconnecting TIPS with other fast-payment systems.

ENVISIONING THE FUTURE OF RETAIL PAYMENTS

RETAIL PAYMENTS WHOLESALE PAYMENTS

-rere FINANCIAL MARKETS OE NRATON
= PAYMENT SYSTEMS
fears schemes

*EPI: European Payments Initiative

MM CREDIT INSTITUTIONS

target

services

TIPS T2 payment system Tas
(fast payment system) (wholesale central bank money) (securities)

@) oTiieR CURRENCY AREAS INFRASTRUCTURES
FPS Payment systems
(fast payment systems) (wholesale central bank money)

4 BRUEGEL - 4 SEPTEMBER 2024 BANQUE DE FRANCE

eurosysttwe

Envisioning the future of retail payments

On wholesale and financial markets, we should develop a new type of
market infrastructure to meet the growing demand for tokenisation in
finance. This is why we need to explore a DLT-based European unified
ledger, namely a new public-private infrastructure built around a
distributed ledger that would include a wholesale central bank digital
currency (CBDC), tokenised commercial bank money and tokenised
financial instruments, and potentially the digital euro later on. This
shared infrastructure would streamline transactions, reduce risks and
costs, and thus foster CMU, while preserving the two-tier financial
system.

AN INNOVATIVE PHASED APPROACH TO SUPPORT EU STRATEGIC AUTONOMY IN PAYMENTS

RETAIL PAYMENTS WHOLESALE PAYMENTS

MULTIPLE SCHEMES. FINANCIAL MARKETS TOKENISATION

=

poses PAYMENT SYSTEMS ECOSYSTEM
4 'card schemes

A PIE

*€PI: European Payr

EUROPEAN
ulti

MH creo InsTITUTIONS

target

services
Commercial

2 payment money

Tokenised
assets

5 BRUEGEL - 4 SEPTEMBER 2024 BANQUE DE FRANCE

An innovative phased approach to support EU strategic autonomy in payments

The transition towards a unified ledger would nevertheless not be a "big
bang", as current TARGET Services in Europe already provide state-of-
the-art services for most use cases. A phased approach could start with
a wholesale CBDC for specific market segments that currently rely
largely on manual and domestic processes; it would gradually extend
into a broader range of tokenised assets and cross-border capabilities.

Let me conclude by borrowing the motto of the Olympic and Paralympic
Games, hosted in Paris this summer: we need to take European financial
services "faster, higher and stronger together"."' To achieve this, we
need to bridge the somewhat mysterious gap between our objectives
and our means. The three ideas I have put forward could be key levers
towards a genuine European "Savings and Investments Union". Thank
you for your attention.

it is illustrated by these telling figures: in the United States, high-tech
industries, supported by a dynamic venture capital ecosystem, account
for 85% of private R&D. By contrast, in the EU, mid-tech industries -
especially the automotive industry - still absorb roughly 50% of private
R&D (Fuest (C.), Gros (D.), Mengel (P.-L.), Presidente (G.), Tirole (J.), EU
Innovation Policy - How to Escape the Middle Technology Trap, European
Policy Analysis Group, Report, 14 May 2024).


iiVilleroy de Galhau (F.), Climate economics: from the veil of uncertainty to
three convictions for action, speech, 25 June 2024
iliVilleroy de Galhau (F.), Ten years of SSM: great achievements, and new

journeys to complete, speech, 24 June 2024

iMECB, Financial Integration and Structure in the Euro Area, June 2024
YArnold (N.), Claveres (G.), Frie (J.), "Stepping Up Venture Capital to
Finance Innovation in Europe", IMF Working Paper No 2024/146, July 2024
viMonnet (J.), "/ have always believed that Europe would be built through
crises, and that it would be the sum of the solutions adopted for those
crises', Memoirs, 1976, p. 488

viiNagel (J.), Monetary union, capital markets union, banking union - a triad

for Europe's prosperity and resilience, speech, 23 April 2024

viliVilleroy de Galhau (F.), Letter to the President of the Republic - France
and Europe : from crisis management to a longer-term ambition, 21 April
2024

Merler (S.), Véron (N.), Memo to the commissioner responsible for
financial services, Bruegel, 4 September 2024

XEuropean Investment Bank, The scale-up gap - Financial market

constraints holding back innovative firms in the European Union, EIB
Thematic Studies, July 2024

xi"Citius, Altius, Fortius - Communiter"

Updated on 4 September 2024