Opinion of the European Economic and Social Committee on ‘The strategic importance of the EU financial sector — How to improve assessment and evaluation’ (own-initiative opinion)
Date: 2023-12-13
Institutions: European Economic and Social Committee
Subjects: application of EU law, banking, competitiveness, economic transition, financial legislation, financial services, financial stability, financial supervision, regulatory policy








C_202401564EN.000101.fmx.xml












Official Journal of the European Union


EN
Series C













C/2024/1564


5.3.2024






Opinion of the European Economic and Social Committee on ‘The strategic importance of the EU financial sector — How to improve assessment and evaluation’
         
(own-initiative opinion)
(C/2024/1564)







Rapporteur:



Antonio GARCÍA DEL RIEGO











Plenary Assembly decision


25.1.2023




Legal basis


Rule 52(2) of the Rules of Procedure




 


Own-initiative opinion




Section responsible


Economic and Monetary Union and Economic and Social Cohesion




Adopted in section


15.11.2023




Adopted at plenary


13.12.2023




Plenary session No


583




Outcome of vote
(for/against/abstentions)


198/0/3




1.   Conclusions and recommendations









1.1.


The European Economic and Social Committee (EESC) supports the development of a more competitive economy as a key priority for policymakers. The banking sector is a key enabler of this ambition given its major role in financing the EU economy and is vital for EU strategic autonomy and the green and digital transitions.












1.2.


The EESC recognises that financial stability is an indispensable prerequisite for growth and competitiveness as it prevents public and private capital from being absorbed by bailouts for failed banks and protects the economy at large from the attendant disruption and collateral damage.












1.3.


The EESC fully supports the diversity of the EU banking sector, comprising banks of different sizes, ownership structures and business models, which contributes significantly to its resilience. This requires a proportional approach to regulation without compromising sound capital requirements and while ensuring that the sector is always under the supervision of the single supervisory mechanism (SSM).












1.4.


The EESC welcomes the introduction of a competitiveness check and believes that its four dimensions should be paired to the specific features of the financial sector. It should serve as a control measure to make sure that proposals support increased competitiveness, more jobs and sustainable growth. The competitiveness check must not be invoked, however, to justify deviations from international standards that the EU is committed to implementing, such as the Basel III framework.












1.5.


The competitiveness check is of special importance for an EU banking sector that has been performing significantly worse than those in other major economies over the course of the last decade. It should serve as a monitoring tool to make sure that new proposals have a positive impact on competitiveness, leading to more jobs and sustainable growth. The EESC notes that the largest US bank has a market capitalisation equivalent to the ten biggest EU banks and that four US investment banks enjoyed a combined market share of 58 % in the EU in 2022. It is important to have efficient EU corporate and investment banking services, considering the risk of overseas banks shutting down their EU activities in the event of market turmoil and thus threatening corporate access to vital resources.












1.6.


The competitiveness check could cover elements related to maintaining a level playing field to ensure that EU banks which operate in multiple jurisdictions are able to compete on equal terms with domestic banks in each of their target markets. It is important to scrutinise whether the proposed legislation contributes to financial market stability and assess both how to further integrate EU markets and attract investment from abroad and how the financial sector supports growth. Finally, a set of indicators should be established in order to assess the degree of digitalisation and the depth of funding.












1.7.


Evaluation and assessments should analyse the impact of new legislation on investment, cross-border activity, recognition of banking business models and the preservation of a level playing field. This will ensure a competitive banking sector that allows for strategic autonomy and that is capable of mobilising the necessary resources for the green and digital transformations.












1.8.


The EESC agrees with the European Parliament’s concern that the Commission has not developed a methodology that covers the cumulative effects of subsequent proposals on competitiveness, and calls for the implementation of the competitiveness check in legislative packages and in the Commission’s work programme as a whole.












1.9.


The EESC considers that the representation of stakeholders in impact assessments (IAs) is poor and that both the process and the practical outcome of these consultations discourage participation.












1.10.


The EESC encourages the strengthening of systemic collection, monitoring and evaluation of critical data to properly feed into the ex post evaluation of initiatives. It also calls for greater effort to encourage stakeholders’ participation in future consultations by better communicating how their views are included in IAs.












1.11.


The European Commission should clarify the methods employed with a view to preserving the distinct objectives, quality and accountability of both ex ante and ex post exercises in the long term.




2.   Background









2.1.


The European Union is engaged in a process of profound transformation of its economy and industry to remain competitive and ensure growth and prosperity, for which a well-functioning and sound financial system is crucial.












2.2.


On 5 April 2022, the European Council highlighted the need to focus on making the EU financial sector (banks, insurance companies and asset managers) strong, competitive and resilient, servicing the real economy and avoiding risks arising from excessive reliance on third-country financial institutions and infrastructure (1).












2.3.


The Banking Union and the Capital Markets Union (CMU) remain incomplete. EU financial markets remain fragmented, and supervisory practice by national competent authorities is not sufficiently harmonised within the EU. All these factors hamper the development of an integrated capital market in the EU (2).












2.4.


Stable and resilient banks are enablers of growth. They provide access to financing, process payments and facilitate saving. In the euro area, they safeguard deposits worth EUR 23 trillion (3), processed 114 billion non-cash payments in 2021 (4), play a critical role in fighting terrorism financing and money laundering, provide 70 % of lending (5) and employ 2,2 million people (6).












2.5.


Nevertheless, the EU banking sector is not performing as well as those in other major economies, such as the USA. Since the global financial crisis, returns on equity averaged 4,3 % in the EU, against 7,1 % in the USA (7). In 2022, the largest US bank’s market capitalisation was higher than that of the 10 biggest euro area banks combined (EUR 462 billion vs EUR 468 billion), which is worse than the situation in 2008 (8). European banks have lost ground in the international arena, particularly in business segments such as Mergers and Acquisitions, where the market share of the top-5 EU banks is 12 % in 2022 (from 25 % in 2010) (9), and in investment banking in general, where USA-based banks increased their market share from 44 % in 2007 to 58 % in the EU in 2022 (10).












2.6.


Multiple factors explain the underperformance of European banks. Global financial crisis and sovereign debt crisis restricted the fiscal capacity of Member States, while the fiscal space of the US allowed it to stabilise and recover the banking sector more quickly (11). The accommodative monetary policy in the euro area compressed the net interest margin and profitability of lending activity. Moreover, overcapacity, market fragmentation and less developed capital markets also put the EU financial sector at a disadvantage (12).












2.7.


Since the global financial crisis, steps have been taken to strengthen the EU’s banking regulatory framework based on the Basel III standards. Other initiatives and measures, such as the introduction of a framework for the recovery or eventual resolution of a failing bank, have also been implemented in order to upgrade supervision with the creation of the SSM.












2.8.


The European Commission also evaluates and improves existing pieces of legislation. The Better Regulation initiative, and more specifically the regulatory fitness and performance programme (REFIT), which aim to ensure that EU policy is evidence-based, make EU laws simpler and better, and involve stakeholders (13). The REFIT programme is part of this initiative. In this mission, the Commission is assisted by the Fit for Future Platform, comprised of stakeholders that deliver opinions that are taken into account later on by the European Commission in its proposals. The EESC is represented in the Stakeholder group of this Platform.












2.9.


Since 1 March 2023, a competitiveness check is implemented in all IAs, strengthening the Better Regulation initiative, covers four dimensions, namely, market functioning and how it works in terms of cost and price formation; specific impact on small and medium-sized enterprises (SMEs); the impact on international competitiveness; and the impact on the capacity to innovate.












2.10.


The European Parliament carries out initial and implementation appraisals. Initial appraisals analyse the strengths and weaknesses of the IAs carried out by the European Commission, at a technical level. Implementation appraisals provide parliamentary committees with an overview of the implementation of a piece of legislation that is part of the Commission Working Programme (14).




3.   General comments









3.1.


The EESC welcomes the decision of the European Commission to introduce a competitiveness check in all future EU policies and legislative proposals, as announced by the Commission at the Tripartite Social Summit. It also concurs with the aim of gaining Strategic Autonomy, the EU’s capacity to pursue its interests without too heavily relying on foreign states (15). The competitiveness check should assess the potential impact of a proposed regulation, that is, ex ante, and/or the effectiveness of the regulation, that is, ex post. It should take into account sustainability considerations that enable the green and digital transitions and evaluate the impact on innovation.












3.2.


The EESC believes that it is important for the competitiveness check to be as comprehensive as possible considering impacts on businesses and supply chains, employment and working conditions, as well as their consequent macroeconomic impacts. A robust competitiveness check for all new initiatives should serve as a control measure to make sure that proposals support increased competitiveness, more jobs and sustainable growth. The EESC notes that competitiveness checks in the financial sector have to fully respect international standards and obligations, such as the Basel III framework.












3.3.


For a stronger Europe, global trade and access to financial services will remain a key driver of economic growth. By enabling the expansion of European corporates or helping foreign companies operate in Europe, European banks contribute to Europe’s success. Cross-border market access, and market efficiency are crucial elements of global trade and prosperous economies.












3.4.


At the same time, a stable, diverse, resilient and competitive banking system is essential, as well as greater autonomy in key segments like investment banking. Structural factors, such as overcapacity, market fragmentation and less developed capital markets put the EU financial sector at a disadvantage. Banking sector value chains in the EU are much less integrated than in the US, with EU banks facing higher competitive pressure and more limited potential to benefit from economies of scale as a result.












3.5.


The EESC notes that the integration of capital markets across the EU is still in the early stages. As a result of Brexit, the EU lost 30 % of its market volume (16). EU capital markets are smaller than in the US, with 13 % vs 45 % of the global market share (17). While the CMU has led to relevant key policy initiatives, major obstacles remain, such as a lack of harmonisation on taxation and insolvency regimes.












3.6.


IAs and ex post evaluation of EU policies should take into consideration the impact on the activity of EU financial institutions operating in third countries, to ensure that the requirements imposed do not create an uneven playing field vis-à-vis local competitors.












3.7.


European financial autonomy, namely, the ability of EU financial actors to efficiently and effectively support the real economy of the EU, is deficient and can be improved. European financial markets are still largely segmented along national lines, with savers and investors depending heavily on national banking systems. Having efficient European corporate and investment banking services, such as debt and capital issuance or structured finance is important, considering the risk of overseas banks shutting down their European activities in case of market turmoil and thus threatening corporate access to vital resources.












3.8.


The diversity of the EU banking sector, comprising banks of different sizes, ownership structures and business models, reflects the diversity of the market it serves and contributes significantly to its resilience. Preserving a level playing field for all market participants in the domestic market is a central tenet of EU law and a critical prerequisite for preserving the competitiveness of EU banks at home and abroad.












3.9.


The lack of competitiveness of the EU financial sector is having a serious impact on our banks, and might have negative consequences in the medium and long-run. The EESC understands that the banking sector needs, as any other, to reach a minimum level of profitability to be sustainable in the long term. Banking profits are an essential generator of capital, which, in return, determines lending capacity and the ability to make distributions to investors. This is especially relevant at a time where a significant amount of financing is needed to achieve the green and digital transitions.












3.10.


The availability of private sector and bank financing will be crucial to support future policy initiatives to strengthen the European economy. EUR 360 billion is the European Commission’s estimate for the additional annual investment now needed to finance its decarbonisation goals for 2030 (18). In a context where banks provide most business financing, with largely undeveloped capital markets and a strong SME segment, banks will be the source of much, if not most, green and digital financing in the EU. Given the huge investment needs that the EU will face in the upcoming decades, it is critical that the EU keep building the CMU and create an attractive, pan-European proposition for private investment from domestic EU investors. Ex post evaluation of EU policies should evaluate the effects on investment, always based on available data.












3.11.


The EESC notes the challenging economic environment and suggests that future policies should focus on growth and competitiveness without compromising consumer protection and financial market stability, which must remain the key policy priorities.












3.12.


In accordance with the EESC opinion on A Capital Markets Union for people and businesses (19), the EESC concurs with the European Court of Auditors, which has noted that the securitisation legislation has not in practice helped banks to increase their lending capacity, especially to SMEs (20).












3.13.


The EESC notes that all the efforts towards achieving a Capital Markets Union, while making progress, have only been partially successful so far. Recent events, including the collapse of Crédit Suisse, demonstrate that more work needs to be undertaken, at both international and EU level, to achieve the policy objectives formulated in the wake of the global financial crisis. The EESC recognises that financial stability is an indispensable prerequisite for growth and competitiveness as it prevents public and private capital from being absorbed by bailouts for failed banks and protects the economy at large from the attendant disruption and collateral damage.




4.   Specific comments









4.1.


The EESC supports the new competitiveness-check for EU legislation. The competitiveness check will cover four dimensions: market functioning and how it works in terms of price formation and costs; specific impact on SMEs; the impact on international competitiveness; and the impact on the capacity to innovate. While the four elements are relevant for all legislative proposals, including those which affect the financial sector, the EESC supports pairing the dimensions to elements specific to the financial sector.












4.1.1.


The market functioning dimension could cover elements related to maintaining a level playing field within the EU to ensure that banks which operate in multiple EU jurisdictions are able to compete on equal terms with domestic banks in each of their target markets and vice versa. Competitiveness is also important for international banks operating in third countries and competing with local players. Furthermore, the level playing field element should ensure EU banks are able to compete effectively against new entrants, such as large technological companies. While progress is being made on the Digital Markets Act (21) and the ongoing review of the Payment Services Directive (PSD2) (22), the EESC recommends that the European Commission identify areas where additional regulatory action is needed in order to apply the same regulation and supervision to all actors providing the same services. Finally, the market functioning dimension should cover elements of financial market stability. Under this dimension the competitiveness check should scrutinise whether the proposed legislation contributes to financial market stability, both in the EU and globally.












4.1.2.


From the perspective of the financial regulation, the ‘impact on SMEs’ dimension covers elements pertaining to access to financing. Analyses of this dimension could draw on existing resources, such as the ECB’s semi-annual Survey on the Access to Finance of Enterprises (SAFE), among others. The EESC recommends that the European Commission identify areas where additional regulatory action would reduce the cost to serve (e.g. increasing the availability of data on SMEs, homogenising the insolvency regime). In this regard, the EESC notes the need to conduct the SME test in a systematic and consistent way.












4.1.3.


Diversity within the EU banking sector, both in terms of size and business models, contributes to its resilience and innovative potential. Accordingly, the EESC is of the view that any policy initiatives that aim to make the EU banking sector more competitive must not lose sight of the need to preserve a level playing field within the EU domestic banking market and ensure that banks of all sizes are able to compete on even terms in their respective markets. This implies a proportional approach to regulation without compromising sound capital requirements, and while ensuring that the sector is always under the close supervision of the SSM. Additionally, the EESC supports international efforts to achieve further harmonisation and streamline regulatory and supervisory action, striving to make it easier and more cost-effective for market participants to comply with regulatory expectations and ensuring consistency with broader policy action.












4.1.4.


Finally, regarding the ‘capacity to innovate’ dimension, the EESC recommends establishing a set of indicators that assess the degree of digitalisation and the depth of funding; for example, indicators like cross-border lending, cross-border initial public offerings, the volume of cross-border investments and the percentage of equity financing raised from capital markets.












4.2.


The EESC regrets the fact that the Commission has not developed a methodology assessing the aggregate impact of policy measures on the competitiveness of the EU, and calls the European Commission to implement the competitiveness check not only on single EU legislative proposals, but also on legislative packages and the Commission work programme altogether.












4.3.


The EESC notes that the competitiveness check forms part of the Better Regulation framework and requests to have access to the new set of ex ante and ex post assessments of the new proposed regulation. In particular, how EU firms successfully compete with businesses around the world, how EU companies operate in non-EU countries versus local competitors, how financial markets in Europe become more integrated and able to attract businesses and investments from around the world and how the financial sector supports growth by meeting the needs of the wider European economy, should be part of the analysis.












4.4.


The EESC takes into consideration the recommendations of the Ex ante Impact Assessment (IMPA) unit of the European Parliament Research Services (EPRS) report on the Commission’s IA methodology (23). The statistical data gathered by the IMPA indicate that 29 % of the appraised IAs published between July 2015 and December 2018 were found to be ‘poor’ and show the need for a more thorough assessment of social and environmental impacts, as well as a more consistent analysis of impacts on SMEs’ competitiveness.












4.5.


One of the points raised by the IMPA relates to the poor representativeness of stakeholders. The EESC concurs with the view that a poor representation of how stakeholders’ views fed into the IA might discourage them from participating in future consultations, which would work against the future aim of promoting consultations at all governance levels.












4.6.


The EESC encourages the systemic collection, monitoring and evaluation of critical data to properly feed the ex post evaluation of an initiative. The Commission should clarify the methods employed with a view to preserving the distinct objectives, quality and accountability of both ex ante and ex post exercises in the long term.












4.7.


While the mandates of the SSM and other competent banking supervisory authorities are clearly focused on price and financial stability, the macroeconomic impact of the financial regulation and its consistency with broader economic policy objectives needs to be duly considered in the political agenda of the EU institutions, and in the design and implementation of assessment and evaluation exercises.












4.8.


The EESC continues to strongly support those measures of the CMU that strengthen the EU’s financial stability and integration and the SSM’s supervision of significant euro area financial entities, or group of entities that are closely interconnected. The EESC notes that the issue of overcapacity remains both a major structural drag on sectorial profitability and a financial stability risk. As pointed out by the ECB and the European Systemic Risk Board, consolidation is not the only solution to address overcapacity: underperforming banks must also be allowed to exit the market in a safe and orderly way (through insolvency or resolution), without political interference.






Brussels, 13 December 2023.


The President of the European Economic and Social Committee

Oliver RÖPKE
            





(1)  Council press release, 5 April 2022 (https://www.consilium.europa.eu/en/press/press-releases/2022/04/05/council-adoptsconclusions-on-strategic-autonomy-of-the-european-economic-and-financial-sector/).

(2)  
            ‘A Capital Market Union for Europe: Why It’s Needed and How to Get There’, IMF, 2019.

(3)  Source: European Banking Federation, 2020.

(4)  Source: European Central Bank.

(5)  
            ‘Financing the Europe of Tomorrow’, European Banking Federation, 2020.

(6)  EBF Facts & Figures 2021 — Banking in Europe, European Banking Federation, 2020.

(7)  A decade after the global financial crisis: What has (and hasn’t) changed? McKinsey Global Institute, 2018.

(8)  Source: Banks Daily (https://banksdaily.com/topbanks/Europe/market-cap-2023.html) and ‘National champions now dominate in banking’, Financial Times, 2023.

(9)  
            ‘European bank M&A activity crashes to 5-year low in 2022’, S&P Global Market Intelligence.

(10)  
            ‘Investment Banking in Europe: where we are and where we are going. Implications for firms, financial institutions and regulators’, Caselli et al, Bocconi University, 2020.

(11)  
            ‘Without the quick and massive policy response, the Great Recession might still plague the United States’, Finance & Development, December 2010, Vol. 47, No 4.

(12)  
            ‘Understanding the profitability gap between euro area and US global systemically important banks’, ECB Occasional Paper Series, 2023.

(13)  
            ‘Better Regulation: why and how’, European Commission.

(14)  See, for instance, the implementation appraisal on anti-money laundering package 2021, European Parliament.

(15)  
            ‘EU Strategic Autonomy 2013-2023’, European Parliament.

(16)  
            ‘Implications of Brexit for the EU financial landscape, Financial Integration and Structure in the Euro Area’, ECB, 2020.

(17)  What do EU capital markets look like on the other side of Brexit? New Financial, 2020.

(18)  SWD(2020) 176 final.

(19)  
            OJ C 155, 30.4.2021, p. 20.

(20)  Special Report No 25/2020: Capital Markets Union — Slow Start Towards an Ambitious Goal, European Court of Auditors, 2020.

(21)  Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) (OJ L 265, 12.10.2022, p. 1).

(22)  COM(2023) 365 final.

(23)  Appraising the quality of the European Commission's impact assessments, Study, EPRS, 2019.


ELI: http://data.europa.eu/eli/C/2024/1564/oj
ISSN 1977-091X (electronic edition)