COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on Long-Term Financing of the European Economy
Date: 2014-03-27
Institutions: European Commission
Subjects: economic growth, economic reform, financial institution, financial legislation, financial market, long-term financing, market supervision, sustainable development













EUR-Lex - 52014DC0168 - EN











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52014DC0168

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on Long-Term Financing of the European Economy /* COM/2014/0168 final */










1.         Introduction

1.1
      Economic context
The economic
and financial crisis has affected the ability of the financial sector to
channel funds to the real economy, in particular to long-term investment. Heavy
dependence on bank intermediation, combined with bank deleveraging and reduced investor
confidence, has reduced funding to all sectors of the economy.  The Union has acted with determination to reverse these trends and restore the conditions for
sustainable growth and investment. Public finances have been consolidated and
procedures for better coordination of budgetary and economic policies have been
put in place. The ECB has acted firmly to restore confidence in the markets,
and the establishment of the Banking Union is helping to reduce financial fragmentation
and restore trust in the Euro area. 
Harnessing these
improvements requires long term investment which can underpin smart, sustainable
and inclusive growth. The ability of the financial system to channel funds to
long-term investments will be essential in securing Europe’s position on a
sustainable growth path.
1.2       The
need for long-term financing
Long-term financing
embodies some key features[1]:

 It finances productive
     activities which support growth by reducing costs,
     diversifying means of production and creating jobs in a smart, sustainable
     and inclusive way;
 It is patient, in that investors
     take into account the long-term performance and risks of their
     investments, rather than short-term price fluctuations.  This long-term
     perspective acts in a counter-cyclical manner and promotes financial
     stability; 
 It is engaged, in that
     investors take longer-term aspects such as environmental, social,
     governance issues into account in their investment strategies. 

Infrastructure
and SMEs are key contributors to sustainable growth.  High quality
infrastructure improves the productivity of the rest of the economy, enabling
growth, and facilitates the interconnection of the internal market.  Investment
needs for transport, energy and telecom infrastructure networks of EU
importance are estimated at EUR 1 trillion for the period up to 2020[2]. 
Significant investment will also be needed in human capital[3] and in
R&D, new technologies and innovation under the Europe 2020
strategy and the 2030 climate and energy package[4].

SMEs
represent
around two thirds of the employment and nearly 60% of the value added in the EU.
They contribute significantly to GDP growth through their overall importance as
well as their ability to innovate, grow and create employment. 
The climate of
uncertainty and risk aversion created by the financial and economic crisis has affected
both the demand and the supply of financing. On the demand side, this has been
evidenced by reduced demand from SMEs, Private Public Partnerships and other
investment projects requiring long-term financing, resulting in a suboptimal
level of long-term investment and financing. On the supply side, the crisis has
increased risk aversion, leading to a preference for liquidity which, together
with bank deleveraging, has affected the economy's ability to finance itself at
long maturities.  The sub-optimal levels of long-term financing also
reflect market failures and inefficiencies in the intermediation chain[5].
Addressing these
issues is a priority for Europe. The capacity of the economy to make long-term
financing available, reinforcing the competitiveness of Europe's economy and
industry, depends on its ability to channel savings through an open, safe and
competitive financial sector. To this end, legal certainty and investor
confidence are essential.
1.3       Green
Paper and public consultation on long-term financing 
The European
Commission adopted on 25 March 2013 a Green Paper on long-term financing, which
initiated a broad debate on the different factors that drive the ability of the
European economy to attract the funds it needs to sustain and accelerate its
recovery. The paper aimed to explore how the savings of governments, corporates
and households could be better channelled to long term financing needs. 
The
Green Paper consultation was very positively received by stakeholders and elicited
292 responses from all segments of the economy[6].
A large majority of stakeholders agreed with the need to broaden the sources of
long-term financing in Europe, while recognising the important role that banks
will continue to play, particularly for SMEs.  While a well-defined and stable
regulatory environment was underlined as very important, many stakeholders also
called for better calibration of regulatory reform to take account of long-term
financing objectives. 
1.4       Other
European and international policy initiatives
The debate on
long-term financing has been echoed at European and international level. The
Economic and Financial Committee set up a High Level Expert Group, which published
its report in December 2013[7],
focused on SMEs and infrastructure. The European Parliament adopted on 26 February
2014 a resolution[8]
on the long-term financing of the European economy. The resolution includes many
of the issues covered by this Communication.
At
the international level, the G20 endorsed in September 2013 a work plan on
financing for investment[9]
and established a working group to carry out further work on long-term finance.
The OECD has developed high-level principles for institutional investors when
engaging in long-term financing[10].
***
Against this
background and building on the Green Paper consultation, this Communication presents
a set of concrete actions. Developing and diversifying how long-term investment
is financed is a complex and multidimensional task, with no single action or
“magic bullet”, but a range of responses and initiatives.  The actions proposed
in this Communication focus on (i) mobilising private sources of long-term
financing, (ii) making better use of public finance, (iii) developing capital
markets, (iv) improving SMEs’ access to financing, (v) attracting private
finance to infrastructure, and (vi) enhancing the overall environment for
sustainable finance. 
The
Commission is also presenting today, together with this Communication:

 A
     proposal to revise the Institutions for Occupational Retirement Provisions
     (IORP) Directive to support the further development of occupational
     pensions, an important type of long-term institutional investor in the EU;
 A
     Communication on crowdfunding, a growing source of financing for SMEs.
2.         Mobilising
private sources of long term financing

The
support  of responsible bank lending and the fostering of non-bank sources of
financing, such as institutional investors, including insurance companies,
pension funds, traditional or alternative investments funds, sovereign funds or
foundations is crucial: while banks will continue to play a significant role,
the diversification of funding is important in the short run to improve the
availability of financing, as well as in the long run, to help the European
economy sustain future crises better.
Banks

Under
the Capital Requirements Regulation (CRR) and the Capital Requirements
Directive IV (CRD IV)[11]
being phased in from January 2014, banks are required to hold higher levels of
capital, increasing their ability to absorb potential losses. An assessment of
the appropriateness of the CRR requirements for long-term financing will be
made by the Commission in two stages, in 2014 and 2015. 
Banks
will also be subject to new liquidity management requirements to enable them to
absorb sudden liquidity shocks. While this should engender more confidence in
the financial system, it is argued that tightened liquidity rules may impact
banks’ ability to lend at long maturities. The implementation of the Liquidity
Coverage Ratio (LCR, a liquidity ratio with a one-month horizon) in Europe and
the current international discussions on the definition of the Net Stable
Funding Ratio (NSFR, a liquidity ratio with a one-year horizon) must find the
right balance between improving the resilience of the banking sector to
liquidity shocks and avoiding excessive restrictions on maturity transformation
that discourage long-term financing.[12]
Furthermore, the CRR provides for the phased-in implementation of the LCR and
introduces a long observation period before any legislative proposal on the NSFR.

The
banking reforms and in particular the Banking Union are crucial to restoring confidence
in the financial sector and reducing the current market fragmentation, which
affects particularly the financing of SMEs. Once these reforms are completed, borrowers
and investors should benefit from a larger, deeper and better regulated and
supervised market. 
The
recent European banking structural reform proposal[13] is
also important, as it aims at safeguarding core financial activities, such as
lending to the economy, by separating these from risky trading activities.  This
would also curb the current cross-subsidisation of trading activities by deposits,
thus increasing the incentives for banks to lend to the real economy. 
Actions

 The Commission will prepare reports
     on the appropriateness of the CRR requirements relating to long-term
     financing by 2014[14]
     and 2015[15].
 The Commission will take the fullest
     account, in the preparation of the Delegated Act on LCR[16]
     (expected in the first half of 2014) and the final calibration of the NSFR[17],
     of the need not to unduly restrict long term financing by banks. In
     addition, full advantage should be taken of the monitoring period in the
     CRR to adjust and address potential unintended consequences of the new
     liquidity rules for long-term investment.

Insurance
companies 
Institutional
investors such as insurance companies are suitable providers of long-term
funding. While investment by institutional investors in less liquid assets such
as infrastructure assets has been limited, the search for higher yields in a
low interest rate environment is increasing their appetite for such assets. 
Solvency
II[18], applicable
from 1 January 2016, will repeal certain investment obstacles, particularly for
less liquid asset classes, which currently exist in Member States. Insurers
will be free to invest in any type of asset subject to the prudent person
principle, whereby they should be able to "properly identify, measure,
monitor, manage, control and report"[19]
the risks associated with such assets. 
It
is argued that strengthening capital requirements to capture all quantifiable
risks, including market risk (which was not considered in the previous legal
regime, Solvency I) may influence the investment behaviour and long-term
outlook of insurers as institutional investors.[20] For
this reason, the Commission asked the European Insurance and Occupational
Pensions Authority (EIOPA) in September 2012 to examine whether the calibration
and design of capital requirements necessitates any adjustment, without
jeopardising the prudential effectiveness of the regime, particularly for
investments in infrastructure, SMEs and social businesses (including securitisation
of debt serving these purposes). EIOPA’s analysis was provided in December 2013.[21] It recommends
criteria to define high-quality securitisation and designs a more favourable
treatment for such instruments, by lowering the corresponding stress factors.[22] This
is a major step in the wider agenda of fostering sustainable securitisation
markets (see Section 4 on securitisation). The Commission will take the
latest EIOPA report into account when formulating the relevant Delegated Acts
for Solvency II, including possible adjustments to the treatment of assets
classes other than securitisation (infrastructure, SMEs and social businesses),
as set out in the original mandate to EIOPA.
Furthermore,
the Omnibus II directive[23]
will introduce measures into Solvency II which are specifically designed to
reinforce existing incentives to match long-term liabilities with long-term assets
and to hold these to maturity. The list of assets eligible for the use of the
matching adjustment has been broadened to include key long-term investments
such as infrastructure project bonds.
Actions

 The Commission intends to adopt at
     the latest in September 2014 the Delegated Act for Solvency II, including
     a number of incentives to stimulate long-term investment by insurers. 

Pension
funds 
Pension
funds are institutional investors with long-term liabilities. As such, they have
the capacity to be "patient" investors.  The Commission welcomes that
pension funds are increasingly turning to alternative investments such as
private equity and infrastructure to diversify portfolios and provide higher
returns[24].
The IORP 2 proposal adopted today could contribute to more long-term investment
by occupational pension funds by limiting the possibilities for Member States
to restrict certain types of long-term investment.
Besides
occupational
pension funds,
personal pension products also have the potential to foster long-term
investment. In November 2012, the Commission invited EIOPA to prepare technical
advice on the development of an EU-wide framework for the activities and
supervision of personal pension products[25].
This would represent an opportunity to mobilise more savings for financing
long-term investment, thereby fostering both retirement income adequacy and
economic growth. EIOPA was asked to consider at least two approaches: (i)
develop common rules to enable cross-border activity of personal pension
schemes; or (ii) develop a 29th regime whereby EU rules do not replace national
rules, but are an alternative to them. EIOPA has delivered a preliminary report
on personal pension products in February 2014.
Actions

 The
     Commission services will issue a comprehensive Call for Advice to EIOPA in
     the second half of 2014 with the objective of creating a single market for
     personal pensions and thus potentially mobilising more personal pension
     savings for long-term financing.

Private
savings accounts
The Green
Paper received some stakeholder support for exploring ways to increase
cross-border flows of savings, including through the introduction of an EU
savings account aimed at offering a standardised framework to encourage savers
to contribute to long-term financing. Such an exercise would first look at national models and consider aspects such as remuneration rates, national deposit protection,
complementarity with existing national schemes, fund collection and criteria
for lending.
Actions

 The Commission services will undertake
     by the end of 2014 a study of possible market failures and other shortcomings
     regarding cross-border flows of savings, including an overview of national
     savings account models and an assessment of the opportunity of introducing
     an EU savings account.

3.         Making
better use of public funding
The
public sector is a key contributor to gross capital formation in the form of
tangible and intangible investment. Efforts are needed to ensure more
transparent and efficient use of public funds, to maximise the return on public
investment, its contribution to growth and its ability to leverage private investment.
The Commission will continue to monitor the fiscal policies of the EU-28,
including the quality of public expenditure and compliance with the Excessive
Deficit Procedure through the EU Semester. In addition, a wide focus, which
addresses also the activity of national promotional banks and export credit
agencies, is needed.
National
Promotional Banks (NPBs) 
National
and regional Promotional Banks play an important role in catalysing long-term
finance along with the EIB/EIF and other Multilateral Development Banks (MDBs)
like the EBRD. In recent years they have stepped up their activities, aiming to
counterbalance the shrinking balance sheets of commercial lenders. Given the
stabilising economic situation and the limited lending capacity of these
institutions, there is a need to focus on market failures and on value added
operations. During the consultation, calls were made for more joint EU-national
or multinational initiatives and for simplified procedures with regard to promoting
cooperation and synergies between the EU budget and the EIB/EIF, MDBs and NPBs,
and with regard to an enhanced involvement of NPBs in EU policies and access to
EU funds. The policies include environmental, climate externalities, innovation,
and social and human capital development. In addition, the issue of coordination
between multilateral banks and NPBs was considered important in order to optimise
synergies and complementarities and to avoid overlapping of efforts and funding
duplication.
Actions

 The
     Commission will issue in 2014 a Communication regarding promotional banks
     to provide guidance on general principles; governance and transparency, as
     key drivers to ensure investor confidence and favourable funding
     conditions; supervision and regulatory aspects; and the role of NPBs in
     co-investing and delivering EU budget funds to support European policy
     priorities for 2020 and beyond. 
 The
     Commission will encourage and monitor the cooperation of NPBs with the
     EIB/EIF and possibly other MDBs as requested by the June 2013 European
     Council and report to the December 2014 Council.

Export
Credit Agencies 
Export
credit agencies are both investors and guarantors/underwriters of risk for long
term financing. As such, they could play an important role in supporting
cross-border investment within the EU, as well as supporting exports of capital
goods outside the EU. This is an area where tensions regarding sovereign risk have
an immediate impact on long term financing, notably in the case of long-term
guarantees. 
Actions

 The
     Commission services will publish a report on promoting better coordination
     and cooperation among existing national credit export schemes. 

4.
        Developing European capital
markets 
Policy
effort is needed in Europe to diversify financing channels. European capital
markets are on average relatively underdeveloped and are currently insufficient
to fill the funding gap created by bank deleveraging.  Appropriate financial
instruments are also required to allow financial markets to play an active and
effective role in channelling funds into long term investment. This includes
innovative financial instruments linked to the key challenges of sustainable
growth in Europe, such as infrastructure, climate and social impact bonds (see
section 6).
Equity
and corporate bond markets
Capital market financing has
suffered significantly since the crisis but the downward trend dates back to
the 1990s. The numbers of Initial Public Offerings (IPOs) in Europe and the US are down roughly five times from their pre-1999 numbers[26]. 
Studies in the US also show that the time to IPO has doubled, from 4.8 years in
the early 1980s to over 9 years since 2007[27].
Even taking into account the cyclical nature of IPOs, these trends are worrying
particularly in terms of job creation since the same US studies show that 92%
of growth in a company occurs post-IPO. The setting up of an IPO Task Force by several
market associations[28]
to address these issues is a welcomed initiative. 
Corporate bond issuance is
used by large, rated companies, with bonds issued in large denominations and
purchased by financial institutions. This market has been growing in recent
years.  These instruments are however not typically available for SMEs/midcaps
although in the past years several markets have also been created for retail
bonds in Germany (BondM market launched in 2010), the UK (ORB launched in 2010), France (IBO launched in 2012) and Italy (ExtraMOT PRO launched in 2013). 

Despite such national
initiatives, European capital markets for both bonds and equities remain
fragmented and not attractive enough for SMEs and mid-caps, with low levels of
cross-border investment in securities other than blue chips. Important
obstacles such as different securities and bankruptcy laws remain.
Actions

 The
     Commission delegated act provided for in MiFID 2[29]
     will ensure that the requirements for SME growth markets minimise the
     administrative burden for issuers on these markets, while maintaining high
     levels of investor protection.  These requirements include the minimum
     proportion of SME issuers on these markets, appropriate criteria for
     admission to trading, information to investors and financial reporting.
 The
     Commission services will undertake a study on whether, following the
     improvements introduced by MiFID 2 for non-equity securities, further
     measures are necessary to enable the creation of a liquid and transparent
     secondary market for the trading of corporate bonds in the EU.
 The
     Commission will assess the implications and effects of the rules of the
     Prospectus Directive by the end of 2015[30].
     This will include in particular an assessment of the proportionate disclosure
     regime for SME issuers and companies with reduced market capitalisation. 
 The
     Commission will explore whether the eligibility criteria for investments by
     Undertakings for Collective Investments in Transferable Securities (UCITS)
     could be extended to securities listed on SME growth markets that display
     certain liquidity characteristics, in view of the implementation of the
     MiFID 2 framework. The issue of whether the European Long-Term Investment
     Funds (ELTIFs) should also be able to invest in listed SMEs is a key issue
     currently debated in the context of the Commission's ELTIF proposal[31].
     The Commission proposal already includes non-listed SMEs as part of the
     asset classes that would be eligible for an ELTIF investment.

Securitisation

Securitisation
transactions enable banks to refinance loans by pooling assets and converting
them into securities that are attractive to institutional investors. From a
bank's perspective, such transactions unlock capital resources, increasing the
ability of banks to expand their lending and finance economic growth. For
institutional investors such securities, if of sufficient size, offer liquid
investment opportunities in asset classes in which they do not invest directly,
e.g. SMEs or mortgages.
Some securitisation
models were inadequately regulated in the past. The weaknesses of these models
have been identified early on and addressed in the subsequent EU financial
reform. Risk retention (“skin-in-the-game”) requirements have been in place in
the EU banking sector since 2011 and have been widened to all financial
sectors. In addition, disclosure obligations have been reinforced to allow investors
to develop a thorough understanding of the instruments in which they
invest.  
Many concrete actions are
being taken by the authorities to make securitisation transactions more
standardised and transparent, thereby enhancing investors’ confidence[32].
EU institutions and agencies need to increase their cooperation and develop
synergies, for instance in terms of the standardisation of reporting templates.
In addition initiatives led by industry such as the implementation of labelling
contribute also to these objectives. 
Despite these measures, no
substantial recovery of this market has been observed so far. This is in large
part due to the stigma still attached to these transactions and to their regulatory
treatment. Many stakeholders have called for a
differentiation of securitisation products for prudential purposes in order to
foster the development of sustainable securitisation markets.  EIOPA’s
technical report for Solvency II and the Commission proposal on banking
structural reform introduce a differentiation for “high” quality securitisation
products.  
Actions
·        
The Commission will work on the differentiation
of “high” quality securitisation products with a view to ensuring coherence
across financial sectors and exploring a possible preferential regulatory
treatment compatible with prudential principles. The Commission will consider
introducing this approach in relevant EU legislation across financial sectors.
The Commission will notably take into account possible future increases in the
liquidity of a number of securitisation products following further
differentiation and standardisation.
·        
The Commission will work with the international standard
setters, in particular the Basel Committee and the International Organisation
of Securities Commissions (IOSCO), to develop and implement global standards
especially on rules on risk retention, high quality standardisation and
transparency to ensure consistency and avoid regulatory arbitrage.
Covered bonds 
Covered bonds embody a
standard means of tapping the capital markets for funding backed by good
quality assets. While for investors these instruments provide safety and
liquidity over senior unsecured securities, for issuers they provide benefits
such as cost effective funding and funding diversification. Although various EU
rules refer to Covered Bonds, there is currently no single, harmonised
framework. Some Member States do not have specific legislation in place. Some
convergence has nevertheless happened following the development of the eligibility
criteria for preferential capital requirements in the banking sector into a
widely accepted market standard[33].
Actions
·        
The Commission will review the covered bonds
treatment in the CRR by the end of 2014[34] with a view to building the basis for an integrated European
covered bond market. The review will consider credit quality, eligible
collateral and transparency. It could also explore strengthening supervision,
enforceability of preferential rights and bankruptcy segregation aspects.
·        
Taking into account the findings of the review
described above, the Commission services will launch a study on the merits of
introducing an EU framework for covered bonds. 
Private
placement 
Private placements can
offer an alternative to bank lending and public corporate bond issuance,
potentially broadening the availability of finance for medium to large unlisted
companies and potentially infrastructure projects. The current regulatory
framework allows private placements and some Member States have already
developed these markets (e.g. the “Schuldschein” market in Germany and “Euro PP” in France).  There is growing supply and demand for this financing channel, as
evidenced by the growth of the existing markets in the EU and by the number of
European issuers accessing the US private placement market[35]. 
However, this activity
has not picked up on a broader European scale. Reasons include lack of
standardised documentation and information on the credit worthiness of issuers
and lack of liquidity in the secondary market.  Since information on recovery
is particularly important for investors in these products, the differences in
European insolvency laws have also been cited as barriers to the development of
a wider cross-border private placement market. 
Actions
·        
The Commission services will conduct by the end
of 2014 a study to map out the private placement markets in Europe against
other locations/practices, analyse their key success drivers and develop policy
recommendations on how this success can be replicated more widely in the EU.  Potential
risks will also be assessed, since private placement markets are by definition
less transparent than public capital markets and are highly illiquid.  The study
will build on the public consultation and the impact assessment carried out in
2007/2008[36].
5.
        Improving SMEs access to
financing
SMEs’
particular dependence on bank funding has meant they suffered the most during
the crisis.  They are still finding it challenging to obtain loans,
particularly in the periphery economies due in part to the fragmentation of the
banking sector[37].

A
key issue for SME finance is facilitating the transition from start-up to SME
to mid-cap i.e. a transition across the so-called “funding escalator”. As they
progress through their life cycle, SMEs use a combination of financing sources
including bank debt and external equity from business angels, venture capital,
private equity funds and ultimately the capital markets. SMEs often find it
challenging to transition from one mix of financing sources to another. Between
different stages of growth, companies face “financing gaps” and “education
gaps”.  This is particularly prevalent at the early stage and at the growth
stage, due in part to limited venture capital funding in Europe. 
In
2011 the Commission adopted an Action Plan on SME financing.  Many of those
actions have been implemented, including regulatory measures, financial
programs and facilitation initiatives. An overview of the implementation of the
Action Plan is provided in the Staff Working Document accompanying this
Communication. Some of these actions are still ongoing, such as initiatives to
address SMEs’ education and information gaps through the Enterprise Europe
Network.  The future Network becoming operational in 2015[38] will
provide more extensive advice and assistance to SMEs on accessing finance, and
will cooperate closely with other local service providers such as financial
intermediaries and accountants.  Various coaching programmes have also been
developed at national level, most notably to prepare SMEs to access capital
markets (such
as the
ELITE programme developed by Borsa Italiana)[39]. 
A
problem often cited as a hurdle that has traditionally made SMEs more dependent
on local bank finance is the lack of adequate, comparable, reliable and readily
available credit information on SMEs. The Commission organised a workshop in November
2013 with a wide range of stakeholders to discuss private and public national
practices and new initiatives, with the aim of finding ways to improve SME
information. The workshop confirmed that there are clear barriers to investors'
and finance providers' access to reliable, available and comparable SME
information across the EU. Such barriers are partly due to the vast differences
between Member States on the degree of public information and its disclosure,
mainly due to the design of the national legal frameworks. 
Actions

 The
     Commission services will undertake in 2014 a mapping of the EU and
     national legislation and practices affecting the availability of SME
     credit information, with a view to considering possible EU approaches to
     the credit scoring industry and assessing the feasibility of
     harmonising/increasing the comparability of SME data across the EU. 
 The
     Commission services will revive the dialogue between banks and SMEs with
     the aim of improving financial literacy of SMEs, particularly with regards
     to feedback provided by banks on loan applications. The Commission
     services will also assess best practices on helping SMEs to access capital
     markets. 

6.         Attracting private finance to infrastructure
delivering Europe 2020
Infrastructure
investment was originally mostly geared towards large capital projects such as
road and rail networks, energy pipelines and transmission grids and national
telecom backbones. The new approach retained under Connecting Europe Facility
(CEF) and European Structural and Investment Funds (ESIF) puts emphasis on
sustainability, energy efficiency, innovation, interoperability and linkages in
a multimodal European infrastructure. This means a shift to rail and
intelligent traffic management in the transport sector, to low carbon power
generation and energy efficiency in buildings and to interconnections in the
energy and ICT sectors. 
The EU Project Bond
Initiative (PBI)[40]
has been highlighted by many stakeholders as a positive example of attracting
private capital to infrastructure projects; the Commission services are
assessing a number of improvements to the PBI and the possible extension of
project bond solutions to other infrastructure sectors, including sustainable
transport, renewable generation and smart grid assets. In
particular practical arrangements for possible contributions under ESIF in line
with the respective regulations may be examined.
In this context, the Commission will
encourage adjudicating authorities throughout the EU to consider, when
economically beneficial, private sector involvement when carrying out
infrastructure projects; it will encourage authorities to employ full-life
cycle and value-for-money analysis and promote bids relying on a wider range of
financing options, fully in line with the recent changes to the public
procurement directives. Improving the availability of transparent information
and data on new Public Private Partnership (PPP) projects could equally attract
institutional investors to European projects.
Despite the importance of infrastructure
investment, there is very little consistent pan-European data available on the
performance of infrastructure loans. The lack of data was highlighted by EIOPA
in their December 2013 report to the Commission as a hurdle that did not it allow
to carry out the necessary analysis to recommend a lower calibration of capital
requirements for infrastructure assets. 
Infrastructure assets are large and
sample sizes are therefore smaller than for typical corporate loans. The data
is often the proprietary information of banks and equity sponsors and subject
to strict confidentiality clauses. Making this data available to the wider
market would not only help in widening the institutional investor base but would
also help regulators explore the merits of a customised prudential regime for infrastructure
investments. 
Actions

 The Commission services will
     evaluate in
     2014
     the feasibility to voluntarily make available, where possible by way of a
     single portal, existing information on infrastructure investment plans and
     projects by national, regional and municipal authorities. 
 The Commission services will
     evaluate in
     2014
     the feasibility and practical arrangements of collecting and, where
     possible, making available comprehensive and standardised credit
     statistics on infrastructure debt within a single access point. This
     exercise would support the work done in the FSB and the G20 context and could
     involve the EIB, EBRD, NPBs and institutional investors.

7.
        Enhancing the wider framework for
sustainable finance 
The
ability of the economy to channel funds to long-term financing is also
dependent on a number of cross-cutting factors, including corporate governance,
accounting, and the tax and legal environment.  The general business and
regulatory environment is important for domestic as well as cross-border
investment.
Corporate
governance
The
way in which assets are managed can play an important role in long-term
financing in terms of aligning the incentives of institutional investors, asset
managers and companies on their long-term strategies, and mitigating concerns
around short-termism, speculation and agency relationships. 
Many
stakeholders as well as a large number of empirical studies and reports have
highlighted the potential benefits of Employee Financial Participation
(EFP) and Employee
Share Ownership (ESO) in terms of enhanced productivity and
competitiveness, on the one hand, and employee motivation and retention on the
other.  Such schemes also put in place long-term oriented and engaged
shareholders. 
There
is also substantial evidence about the importance of Environmental, Social and Governance
(ESG) issues for the longer-term sustainable performance of companies and
investors engaging on these issues. The Commission has already worked on
several initiatives to increase corporate transparency by companies, like the
proposal on non-financial reporting[41]. However,
only a small number of investors take ESG issues into account when building
their portfolios and certain investors even consider that integrating such
factors would go against their fiduciary duty to maximise returns for
beneficiaries. 
Actions
·        
The
Commission will consider a proposal for the revision of the
Shareholder Rights Directive to better align long-term
interests of
institutional investors, asset managers and companies. 

 Under
     the European Parliament Pilot Project on “Promotion of Employee Ownership
     and Participation“, the Commission will in 2014 assess
     ESO across the EU with a view to identifying problems with cross-border implementation
     of EFP/ESO schemes and formulating possible EU actions to promote EFP and
     in particular ESO.

·        
The
Commission will consider a Recommendation aimed at improving the quality of
corporate governance reporting, a report on incentives for institutional
investors and asset managers to take better account of environmental (for
example carbon footprint and climate risks), social and governance information
(ESG) in their investment decisions, and  a study on fiduciary duties and
sustainability. 
Accounting
standards 
The
Green Paper explored the question of balancing the accuracy of the information
given to investors with sufficient incentives to hold and manage long-term
investments. In this context fair value accounting was criticised by
a range of stakeholders for introducing market volatility in financial reports
and therefore favouring short-term behaviour. Many respondents
commented on the significance of the IASB Conceptual Framework for ensuring
that future accounting standards are developed in a way that is not damaging to
long-term investment. They also pointed to the ongoing work of
the IASB to review the accounting of financial instruments (IFRS 9). 
The
2002 International Accounting Standards (IAS) Regulation is being evaluated,
including with respect to whether the endorsement criteria established in 2002
are still appropriate and adequately robust for Europe today and for the future[42]. 
The
accounting treatment of SMEs plays an important role in this respect. Many
stakeholders have asked for a simplified version for listed SMEs of the full
set of IFRS standards applicable to all listed companies, while recognising
that robust standards are needed to maintain investor confidence.[43] In
addition, for non-listed SMEs a complete self-standing accounting framework
could be useful for cross-border groups. Today, non-listed SMEs are subject to
national accounting rules based on the recently revised EU Accounting Directive,
which sets common basic principles that Member States have to apply when
designing their national accounting frameworks for SMEs (see the Staff
Working Document). 
Actions
·        
In the framework of its endorsement of the
revised IFRS 9, the Commission will consider whether the use of fair value in
that standard is appropriate, in particular regarding long term investing
business models.
·        
The Commission will invite the IASB to give due
consideration to the effect of its decisions on the investment horizons of
investors both in specific relevant projects and in its development of the Conceptual
Framework, paying particular attention to the reintroduction of the concept of
prudence.

 The
     Commission services’ evaluation of the IAS Regulation will explore with
     stakeholders in the course of 2014 the appropriateness of the endorsement
     criteria, taking account of Europe’s long-term financing needs. 
 The
     Commission services will launch a consultation in 2014 to examine (i) the
     case for a simplified accounting standard for the consolidated financial
     statements of listed SMEs, and (ii) the usefulness of a complete
     self-standing accounting standard for non-listed SMEs to supplement the
     Accounting Directive.
Tax and legal environment

A
large majority of corporate tax systems in Europe (and internationally) favour
financing by debt against equity by allowing deduction of interest costs, while
there is no similar treatment for the costs incurred in raising equity. 
This tax bias towards debt financing may incentivise companies to take on more
debt and may penalise innovative companies and start-ups financed through
equity.  This issue raised considerable interest in the public consultation. 
Concerning
the legal environment for long term finance, discrepancies between the insolvency
laws of Member States and inflexibilities in these laws create high costs for
investors, low returns to creditors and difficulties for businesses with
cross-border activities or ownership across the EU.  These inefficiencies
affect the availability of funding as well as the ability of firms to get
established and grow, with particular impact on SMEs. In addition, legal
hurdles exist regarding the transfers of claims, known in legal terms as assignments
of claims, involved in many cross-border financing transactions, such as securitisation
and factoring.  The absence of a clear regulation at the EU level[44]
creates legal uncertainty for cross-border assignments of claims. 
Actions
·        
The Commission will continue, through country
specific recommendations in the European semester process, to incentivise
equity investment in particular for Member States with high debt bias in
corporate taxation. 

 As
     provided for in its Recommendation of March 2014[45]
     on best practice principles to enable the early restructuring of viable
     enterprises and to allow bankrupt entrepreneurs to have a second chance, the
     Commission will review the implementation of the Recommendation and will
     assess possible additional measures.

·        
The Commission services will publish in 2014 a
report on the law applicable to third party aspects of the assignment of
claims. 

8.         Conclusion

Fostering
long-term financing is essential for Europe's smart, sustainable and inclusive growth.
This Communication sets out a broad range of initiatives on different fronts. 
Some relate to existing legislation, while others are of a more exploratory
nature. They all intend to make the financial system better in channelling
resources towards long term investments. 
The Commission is
committed to implementing this action plan. It will to that effect meet as
necessary, and on a regular basis, with all the relevant stakeholders. The
Commission calls on Member States and the European Parliament to support the
initiatives presented in this Communication.  
[1] Terms introduced by
the OECD in “Promoting Longer-Term Investment by Institutional Investors:
Selected Issues and Policies”, 2011, http://www.oecd.org/daf/fin/private-pensions/48616812.pdf.
[2] Connecting Europe Facility: c.EUR500bn in transport, EUR200bn in energy and EUR270bn in fast broadband
(http://ec.europa.eu/transport/themes/infrastructure/connecting/doc/connecting/2012-10-02-cef-brochure.pdf).

[3] See
Social Investment Package, COM (2013)83 of 20.2.2013.
[4] Communication on a
policy framework for climate and energy in the period from 2020 to 2030, http://ec.europa.eu/energy/doc/2030/com_2014_15_en.pdf.

[5] For
a detailed explanation see the Commission Staff Working document accompanying
the Green Paper on long term financing: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=SWD:2013:0076:FIN:EN:PDF.

[6] A detailed summary
of responses as well as the non-confidential responses can be found at
http://ec.europa.eu/internal_market/consultations/2013/long-term-financing/docs/summary-of-responses_en.pdf.
[7] http://europa.eu/efc/working_groups/hleg_report_2013.pdf.
[8] http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2013/2175(INI)&l=en.

[9] See http://en.g20russia.ru/news/20130906/782782178.html.

[10] See http://www.oecd.org/finance/private-pensions/G20-OECD-Principles-LTI-Financing.pdf.

[11] Regulation 575/2013 of
the European Parliament and of the Council of 26 June 2013 on prudential
requirements for credit institutions and investment firms and amending
Regulation 648/2012 and Directive 2013/36/EU of the European Parliament and of
the Council of 26 June 2013 on access to the activity of credit institutions
and the prudential supervision of credit institutions and investments firms,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC and
2006/49/EC.
[12] Cf.
Recital 100 of Regulation 575/2013.
[13] COM/2014/043.
[14] Article 505: The
Commission shall report by 31 December 2014 to the European Parliament and the
Council about “the appropriateness of the requirements of this Regulation in
light of the need to ensure adequate levels of funding for all forms of
long-term financing for the economy, including critical infrastructure projects
in the Union in the field of transport, energy and communications”.
[15] Article 516: The
Commission shall report by 31 December 2015 on the impact of this Regulation on
the encouragement of long-term investments in growth promoting infrastructure.
[16] Article 460 of the
CRR.
[17] Article 510(3) of the
CRR.
[18] Directive
2009/138/EC of the European Parliament and of the Council of 25 November 2009
on the taking-up and pursuit of the business of Insurance and Reinsurance
(Solvency II).

[19] Article 132 of
Solvency II.
[20] Capital requirements
are only one driver of investment decision, alongside tax regimes, accounting
rules or lack of insurers' expertise in less liquid assets.
[21]  See https://eiopa.europa.eu/fileadmin/tx_dam/files/consultations/consultationpapers/EIOPA-13-163/2013-12-19_LTI_Report.pdf.
[22] Unlike in the banking
sector, capital requirements depend on each insurer’s risk-profile and are much
lower than the stress factors because the calculation is not purely
factor-based. Capital requirements correspond to insurers' potential loss in
stressed market conditions, after taking into account a number of mitigating
factors specific to each insurer (reduction of future bonuses to policyholders,
deferred tax credits, hedging, diversification with other sources of risk,
etc.).  Based on the most recent Europe-wide quantitative impact studies, the
Commission estimates that capital requirements for market risk in a typical
life insurer with long-term liabilities are between two and three times lower
than the stress factors for each type of investment.
[23] A directive proposed
in 2011 (COM 2011/0008) to adapt Solvency II to the new framework for
implementing measures introduced by the Lisbon Treaty and to the creation of
EIOPA.
[24] However, the
proportion of their assets allocated to such investments remains limited,
particularly for infrastructure assets. For example, a recent OECD survey of 86
large pension funds and public pension reserve funds (http://www.oecd.org/daf/fin/private-pensions/survey-large-pension-funds.htm) found that only 1%
of their assets were invested in unlisted infrastructure investments and 12-15%
were invested in other alternative investments (the rest of the assets were
invested in fixed income, cash and listed equity).
[25] http://ec.europa.eu/internal_market/pensions/docs/calls/072012_call_en.pdf. 
[26] IPOs for UK, Germany, France,  Italy and Spain declined from c. 350 per year between 1996-2000 to c. 70 per
year during 2008-2012 (see OECD Working Paper “Making Stock Markets Work to
Support Economic Growth” http://www.oecd-ilibrary.org/governance/making-stock-markets-work-to-support-economic-growth_5k43m4p6ccs3-en).
A similar decline was registered in the US, from c. 500 IPOs per year pre-1999
to c.  100 post-1999 (see http://www.sec.gov/info/smallbus/acsec/ipotaskforceslides.pdf).
[27] See http://www.sec.gov/info/smallbus/acsec/ipotaskforceslides.pdf.

[28] The Federation of
European Securities Exchanges (FESE), EuropeanIssuers and the European Private Equity and Venture
Capital Association (EVCA). See http://www.fese.eu/en/?inc=cat&id=8.
[29] According to Art. 35
of Directive of the European Parliament and of the Council on markets in
financial instruments repealing Directive 2004/39/EC (MiFID 2) as drafted in
the final compromise text.
[30] Article 4 of Directive
2010/73/EU of
the European Parliament and of the Council of 24 November 2010 amending
Directives 2003/71/EC on the prospectus to be published when securities are
offered to the public or admitted to trading and 2004/109/EC on the
harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market.
[31] See for example
European Parliament Kratsa-Tsagaropoulou draft report on the proposal for a
regulation of the European Parliament and of the Council on European Long-term
Investment Funds.
[32] The main initiatives
are the legal provisions  in Credit Agencies Regulation requesting ESMA to
establish a public website (CRA3, art. 8b ) and the centralised European
DataWarehouse (EDW) sponsored by the ECB.
[33] The provisions
included in CRD from 2006 and now CRR has already led to an important
harmonisation as regards the range of eligible assets for CBs. Also, as regards
transparency, the CRR has also already set a minimum standard.
[34] See CRR article 503.
[35] In 2012, 36 European
companies (of which 11 smaller companies, with revenues below $500m) used the US private placement market, for an amount of almost $20bn. See  http://www.thecityuk.com/research/our-work/reports-list/alternative-finance-for-smes-and-mid-market-companies/.

[36] See http://ec.europa.eu/internal_market/investment/private_placement/index_en.htm.

[37] See the ECB Survey on the
Access to Finance of SMEs in the Euro Area, April 2013 to September 2013 http://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201311en.pdf?acff8de81a1d9e6fd0d9d3b38809a7a0. 
Only 33% of SMEs that apply for credit in Greece receive the full amount and
only 50% do so in Spain and Italy (compared to a 65% average in the euro area
and 87% in Germany) . However, some data is timidly
improving: 60% of SMEs in Ireland report full success in obtaining a loan
compared to 30% in the preceding six months, while in Spain this has also improved from 40% to 50%.
[38] See recent call for
proposals by the Commission (http://ec.europa.eu/enterprise/contracts-grants/calls-for-proposals/index_en.htm).
[39] See http://elite.borsaitaliana.it/en. 
[40] The PBI is a
risk-sharing instrument created by the Commission and the EIB with the aim to
enable project companies to issue project bonds that are attractive to debt
capital market investors in the sectors of trans-European networks in transport
(TEN-T), energy (TEN-E), and telecommunication and broadband networks.
[41] COM(2013) 207.
[42] See Philippe Maystadt's
report "Should IFRS Standards be More European?", http://ec.europa.eu/internal_market/accounting/docs/governance/reform/131112_report_en.pdf.

[43] The International
Accounting Standards Board (IASB) has developed a set of simplified standards,
the so-called IFRS for SMEs. These are however aimed at non-listed companies.
[44] Regulation 593/2008 on
the law applicable to contractual obligations (Rome I) currently does not
expressly regulate this issue.
[45]  C(2014) 1500