If losses have to be shared on a large scale this can put the core of the financial system in peril. Corporate bonds and securitised assets can have similar risks, especially if they are effectively held in the banking system. Debt instruments generally can be destabilising if they cannot easily be restructured when losses occur. Equity provides the most efficient form of risk sharing, suggesting perhaps that this area should be a priority for CMU. The nature of investors also matters in ensuring that an increase in cross border market-based financing in the EU does not increase financial stability risks. In general, sources of market-based financing are more likely to be resilient if the investor base is diverse, not excessively reliant on leverage and “sticky”. It is abundantly clear from all of the above that achieving the necessary step change in market-based financing in the EU means a marathon not a sprint. Although it shares its nomenclature with Banking Union, Capital Markets Union is a very different animal. The former is essentially designed to improve stability of and between the euro members through institutional change and moving major financial stability responsibilities to sit at the euro level alongside monetary stability. It was possible to make these institutional changes relatively quickly, though their implementation will take longer. Capital Markets Union, in contrast, aims to deepen and widen the single market, though it needs to have regard to financial stability. It does not require institutional change.

If EU regulation and internationally agreed standards diverge materially, it will both create barriers to that activity and opportunities for regulatory arbitrage making it more difficult to ensure UK financial stability. My third example is the European Supervisory Authorities – the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA). These were established to provide more detailed common rule making so that the EU Single Market in financial services could be supported by a common rule-book underneath the framework of high-level legislation. This search for more detailed alignment of regulation and standards has I think been a general feature of the post crisis reforms in the EU and more widely. The ESAs are governed by their boards, comprising national supervisory authorities, which are also responsible for the majority of their financing. They set and advise the Commission on the rules and standards – they do not engage directly in the prudential supervision of firms. The European Supervisory Authorities perform another important function. I have talked about common rules, commonly applied. There are of course enforcement mechanisms in the Treaties to ensure member States properly observe the EU legislation. But the need for this in financial services has been especially recognised with the ESAs having the capability to conduct peer reviews and for binding arbitration when one national authority believes another has not properly implemented or applied the rules. This is a powerful mechanism to prevent regulatory arbitrage and the risk of adverse spillovers between member states.