Sabine Mauderer: Brexit - a push for market integration
Keynote speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche
Bundesbank, (held by Mr Peter Griep, Director General Markets on behalf of Dr Sabine
Mauderer), at the GFF Summit 2020, Luxemburg, 29 January 2020.
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Introduction
Ladies and gentlemen,
Let me start by thanking Clearstream for the kind invitation to speak to you today.
I am delighted that the Bundesbank is part of this event, as it has been in previous years.
Looking at the calendar, the date of your conference is quite momentous - we are two days
away from Brexit.
Since 2016, Brexit has implied a great deal of uncertainty, raising complex legal and operational
questions. On the one hand, this is true for central bankers.
For example, we have to consider that, in our asset purchase programme, investors in the UK
have been the most active sellers located outside the euro area.
Moreover, banks in the UK have been the main facilitators of APP bond sales by non-euro area
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investors.
On the other hand, you as financial market participants have had to deal with complex Brexit
challenges as well, for example when it comes to CCP services.
The precise role that London - and CCPs based in the City - will play for the EU will only emerge
when the final terms of the future EU-UK relationship have been agreed.
We all hope that the political process will come to a timely and successful conclusion, so we can
leave talk about cliff-edge risks behind us.
Continued access to UK CCPs was a hot topic in 2019.
Meanwhile, market participants in the EU wish to have continued access to UK CCPs even
beyond December 2020.
To this end, an equivalence recognition of the future UK CCP regime in accordance with EMIR
2.2 is one of the requirements.
This is quite a challenge, taking into account that the stated objective of the UK government is to
diverge from the EU regulatory regime.
Since EU and UK financial markets are so deeply intertwined, many market participants hope
that the EU and the UK will find a bilateral regulatory post-Brexit arrangement.
A modus vivendi that guarantees the current access to UK clearing houses at acceptable
conditions in the future.
Hoping for regulatory post-Brexit arrangements is one thing. Developing EU-based industry
alternatives is another.
A well-known alternative is Eurex Clearing's Partnership Program.
However, market concentration is still high. For example, about 85% of euro-denominated OTC
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interest rate swaps are cleared at LCH Ltd. in London.
In the face of market concentration and relatively slow-moving market practices, it is quite
obvious that developing a complete supply chain in the EU may take some time.
For regulators and the Bundesbank as part of the Eurosystem, financial stability remains our
paramount concern in the discussion on CCPs.
We have to be vigilant with regard to concentration risks.
Apart from their systemic importance, resilient CCPs also matter for the smooth functioning of
payment systems and effective conduct of monetary policy.
In its role as the central bank of issue for the euro, the Eurosystem needs to effectively oversee
euro-denominated clearing activities, no matter where they are established.
So summing up, what we need is a balance between regulatory cooperation, further developing
EU-based alternatives and preserving financial stability.
Striking this balance is essential for the EU to become a true and sustainable powerhouse in the
global financial system.
But even though resilient EU-based CCPs can make an important contribution to this European
powerhouse, they cannot shoulder this task on their own, of course.
What we need on a wider scale is to forge an integrated capital market in the EU - a capital
markets union.
This continues to be the European Commission's policy objective.
More integrated markets, based on common, proportionate and effective rules and regulations,
would boost your business as market participants. They would also help to make our economic
and monetary union more stable in the long term.
What opportunities do integrated capital markets have to offer?
So what I will do next is focus on the integration of the EU's capital markets.
The key questions are:
First, what opportunities do integrated capital markets have to offer? And:
Second, how can the EU press ahead with market integration?
The first question - about the opportunities offered by integrated, and thus deeper, capital
markets - can be answered in a number of ways. Allow me to touch upon three of them.
The first, and most important, is: capital markets can boost growth potential.
They channel savings to where the greatest benefits are expected: to the best ideas and firms.
If we use the size of capital markets as a rough measure of how they power the economy,
Europe has a vast amount of untapped potential.
At any rate, the differences compared to the financial markets in the United States are
considerable.
Let's compare the domestic equity markets: in the United States they are about 148 percent of its
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GDP. In the euro area, it is just 50 percent of its GDP.
Second, integrated EU markets are becoming increasingly important in a changed global setting.
If others cut themselves off, it is crucial for Europe to bundle its power. This is the only way to
gain resilience and become less dependent on financial flows from third countries.
At the end of the day, it is about funding the major projects for the future of the EU. It is about
successfully transitioning to an innovative digital and climate-neutral economy!
Third, speaking as a Eurosystem central banker, I support integrated markets from a monetary
policy perspective as well.
Cross-border capital ties are a channel of private risk sharing in a monetary union. Just to give
you one example: If company owners are residents in different states, the distribution of business
profits and losses spread shocks throughout the currency area. Thus, economic shocks that hit
individual member states particularly hard could be cushioned.
Without being a magic formula, market integration can thus help to make our economic and
monetary union more stable in the long term and contribute to greater financial stability.
How can the EU press ahead with capital market integration?
But how can the EU press ahead with the integration of its capital markets? This is the second
question I would like to address.
Since the start of the project in 2015, it has been clear that establishing a capital markets union is
a complex mission, and also a multidimensional and long-term effort.
In the past, progress often came to a halt when the differences in legal and tax regimes or capital
market supervision seemed to be too great.
Furthermore, there needs to be greater trust: both among Member States and also in their
relationships with the Commission.
For the sake of making concrete progress on the capital markets union agenda, the Bundesbank
can see at least two areas where pan-European approaches offer particularly rich potential.
First, broader capital market access for SMEs;
And second, more capital market culture among retail investors, particularly with a view to
strengthening old-age provision.
Needless to say, sustainable finance also offers a huge amount of potential. The European
Commission is aiming for a Green Deal to make Europe the first climate-neutral continent by
2050.
Broader capital market access for SMEs
My first point - broader capital market access for SMEs - builds on the lessons learned from the
past decade.
In the euro area, the sovereign debt crisis mainly affected banks in Member States regarded as
less creditworthy.
As a result, some areas lacked financial support when they needed it most. Small businesses
with no access to capital markets were hit especially hard by banks' restraint.
Much has happened since then. For example, we have introduced a countercyclical capital buffer
to boost resilience in Europe's banking sector.
At the same time, it's always a good idea to have a broad range of funding options to choose
from.
Capital market solutions can pick up where bank-based funding leaves off.
It's the start-ups I'm mainly talking about here. This is where the benefits of venture capital are
particularly evident.
And yet, compared to regions like America or Asia/Pacific, venture capital markets in many EU
countries are still underdeveloped.
The list of countries with room for improvement includes Germany, where plans for a
government funding programme have been aired recently.
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According to the latest report , there were positive developments in EU venture capital markets
in 2019.
It is very promising to go further down this road as a way of unleashing fresh innovative potential.
Of course, broader capital market access does not mean doing away with bank-based funding -
just complementing it.
On the other side, we need to improve conditions for those providing capital.
Investors need clear and reliable investment conditions in order to make commitments.
This includes, of course, the most harmonised legal regime possible, and also better information
about corporates.
In a broader context, the capital markets union, together with the banking union, needs to
become a fully-fledged financing union that promotes investment and innovation in Europe.
We have achieved a great deal for the banking union within just a few years.
A strong pan-European banking supervisor, the SSM, is up and running.
And the Single European Resolution Mechanism, the SRM, has already proved that it functions.
The recent push by Finance Minister Scholz on the European deposit insurance scheme shows
that Germany is serious about promoting integrated funding markets in Europe.
It is still important that certain preconditions are met before a common deposit insurance
scheme can be established.
Despite all the controversy, one thing is clear: progress on the banking union also advances the
capital markets union - not least because banks are major players in the capital market. Their
job is to act as a "door opener" for businesses.
More capital market culture in old-age provision
Another area where Europe could go further is in promoting a capital market culture for retail
investors, particularly when it comes to old-age provision.
The euro area, for instance, has its own "untapped" funding source: savings surpluses of more
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than €300 billion a year.
These savings surpluses are driven in part by the greater need to provide for old age in times of
demographic change and low interest rates.
Capital markets have the task of bringing together old-age provision and robust investment
opportunities.
Sadly, though, the market for private old-age provision is still fragmented. Different regimes at the
national level are preventing the emergence of a pan-EU market for pension products.
What is more, only a limited number of products are based on capital market instruments. This
drives up costs for savers and restricts market liquidity.
The newly established pan-European personal pension products (PEPPs) are designed to
remedy this situation.
In general, savings can impact more strongly on the economy if sound investment options are
available across national borders.
And to flank these efforts, we need to do more to promote financial literacy. Savers need to
become confident investors with a keen eye for opportunities and risks.
Conclusion
Ladies and gentlemen, let me conclude by summing up my main messages.
With regard to European market integration, there are four points we need to bear in mind.
First, integrated markets can tap into the growth potential of the financial sector and real
economy more effectively;
Second, market integration can help ensure greater financial independence;
Third, market integration can enhance financial stability, particularly in the euro area.
And fourth, we need progress in terms of market access for SMEs and capital market culture in
old-age provision.
With regard to Brexit, strengthening our own market infrastructures - the lifelines of the EU
capital market - will help Europe become a powerhouse in the global financial system.
Striking a balance between regulatory cooperation, further developing EU-based alternatives and
preserving financial stability is essential when it comes to CCPs - which are one of the core
topics of this conference.
In closing, allow me to wish you all a pleasant and successful event!
Thank you for your attention.
5ECB Monthly Balance of Payments (2019).