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Putting the Capital in the European Capital Markets Union

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Putting the Capital in the European Capital Markets Union Putting the capital in the European Capital Markets Union Joanna Cound Martin Parkes Laetitia Boucquey Head of Public Policy, Managing Director, Associate, Public EMEA Public Policy Policy Stephen Fisher Carey Evans Managing Director, Director, Public Policy Public Policy Executive Summary Summary of BlackRock remains strongly supportive of the Capital Markets Union (CMU). Building deeper, better-connected capital markets recommendations in Europe is an important objective to promote investment, realise Promote retail investor participation the goal of a true Single Market for capital, and help European savers and companies realise their long-term financial objectives. 1. Simplify the investment process 2. Harness the power of digital tools to engage To date, the CMU has built a policy agenda that, when seen with consumers through to completion, will provide a framework for advancing this 3. Allow regulation and supervision to follow the aim. But important challenges remain, and some of the remaining move away from selling individual products to barriers will be difficult to break down, both technically and providing multi-product solutions politically. We see the most valuable way to add greater imperative to addressing these challenges is to refresh the CMU agenda so 4. Focus on value for money across the entire that it can deliver something meaningful and tangible for chain of distribution with meaningful European citizens: improved ability to save more effectively in the comparability and transparency of products, long-term and to better connect to broader economic prosperity. advice, and distribution 5. Encourage Member State initiatives to drive The result will be mutually beneficial to European citizens, increased investment; such as auto- companies and policymakers. A more engaged investor base not enrolment only represents a growing supply of capital for companies to tap for investment, but equally advances a number of key policy aims: Optimise the capital markets reinforcing the Banking Union and European Monetary Union, architecture to maximise investor underpinning the role of the euro globally, and meeting the utility European Union’s (EU’s) ambitious sustainable investment goals. 6. Address market fragmentation to deliver for In this ViewPoint , we set out a vision for a recast of the CMU that end-investors breaks down across three pillars: 7. Underpin investor confidence in central clearing • Pillar One: A meaningful policy vision to balance investor protection and investor inclusion with a focus on enabling A company-oriented vision for capital greater retail investor participation raising in Europe • Pillar Two : Bedding down an investor-friendly capital markets architecture that lets European investors benefit from the 8. Re-imagine the funding escalator combined scale of European and global markets 9. Optimise the ELTIF structure and tax • Pillar Three : A clearer vision for capital-raising across Europe, framework for investors to better deploy based on further work with companies to meet their funding capital needs blackrock.com/publicpolicy The opinions expressed are as of October 2019 and may change as subsequent conditions vary. October 2019 | Public Policy | ViewPoint Introduction • European Banking Union – a critical goal of the The CMU was first articulated by the Juncker Commission Banking Union is to increase the resiliency of the in 2014. Its goal was to promote the growth of market- banking sector. Vibrant capital markets can provide a based finance as a complement to bank funding in Europe, meaningful risk transfer mechanism away from the and to better connect national capital markets in Europe. banking sector, and can directly support banks’ lending The EU’s Single Market would deliver a scale and efficiency and finance provision capacity. benefit, creating investment opportunities for Europe’s savers, and providing more capital to Europe’s companies. • Economic and Monetary Union – deeper European capital markets can create an effective cross-border 1 The European Commission’s 2015 CMU Action Plan set private sector risk sharing mechanism that can help ambitious legislative objectives and, importantly, changed lower the need for sovereign-level risk sharing in times the tone of the political conversation about capital markets of economic stress. from one of post-crisis remediation and reform to one of promoting market-led economic growth. • Enhancing the international role of the euro – deeper European capital markets which remain open and Developing liquid and integrated European capital markets attractive to global investment and where EU investors remains a work in progress and should continue to be at can seek global investment opportunities will increase the top of the European Commission’s agenda during the the internationalisation of the euro. 2019-2024 legislative mandate. Indeed, the prize for delivering on the objectives of the CMU remains great. • Growing and promoting sustainable finance – the principal aim of the EU Action Plan on Sustainable Despite progress made to date in growing forms of market- Finance is to mobilise capital to support sustainable 2 based finance in Europe , the financing that capital investment. 3 A central premise of this agenda is the markets can provide as a complement to well-developed increasing interest of average retail savers in putting bank funding channels in Europe remains a significant their capital to work towards advancing sustainability source of as-yet untapped potential (Exhibit A). goals. Growing European capital markets through increased investment (especially retail investment) is Exhibit A: Bank lending vs. corporate bonds critical to achieving the aims of the EU Sustainable Structure of capital markets (end-2017, % GDP) finance agenda. • 400% Stimulating growth and economic resilience – continued progress on further diversifying funding channels will enhance the overall systemic resilience of 80% 300% 103% the European economy. 32% 20% A clear re-articulation of the CMU goals and agenda is 200% 85% 69% 100% needed to create the political imperative to take the 11% necessary steps at both European and national levels. A 100% 66% number of EU legislative files in implementation or under 156% 127% review in the coming legislative term serve as important 68% 0% building blocks for CMU; delivering and further optimising EU-27 UK US these will materially advance the aims of the CMU. Financial institutions debt securities Corporate debt securities Government debt securities Public equity markets In addition to the EU legislative agenda, the full benefits of the CMU will ultimately depend on action taken by the Source: 2018 ECMI Statistical Package and the Lannoo, K. and A. Thomadakis (2019), “Rebranding Capital Markets Union: A Market Finance Action Plan”, CEPS-ECMI Task Member States in areas such as taxation, pensions and Force Report, Centre for European Policy Studies financial education policy, where they generally have the right of initiative and competence. Fulfilling the goals of the CMU is as necessary today as it This re-articulation of the CMU goals and agenda must was when the project was first conceived. The direct benefits answer not just what the CMU means to the EU project, but of further building up the CMU are only part of picture. what the CMU can mean to European citizens. There are a number of areas where progress in the CMU would be highly complementary to other EU strategic We continue to believe that an investor centric effort to priorities. For example: make European capital markets better connected and more efficient will yield great economic benefits for investors and companies alike. 2 An investor friendly capital markets architecture that, for Pillar One: Promote retail example, gives investors transparency of trading activity across all European venues, strengthens the integration investor participation and competitiveness of European markets, increasing long term savings for European citizens and lowering the cost of Michael Gruener capital for European companies. Similarly, a clear Head of framework that protects end investors from bearing undue BlackRock's EMEA losses due to the failure of Central Counterparties (CCPs) is Retail business essential for investor confidence and a durable CMU: investor participation in central clearing is the backbone of The CMU’s goal of encouraging deep and robust capital systemic resiliency. markets across Europe requires significant retail investor However, the area of the original CMU agenda that has participation to become a reality. It follows that a renewed probably been the least developed is the one where we focus on creating a framework to support increased retail still believe the greatest dividend for Europe is to be participation in capital markets should be at the centre of found: a meaningful approach to incentivising savers to the European Commission’s mission statement on driving invest in capital markets that both brings more capital the CMU forward. into European markets and psychologically more Exhibit B shows a significant reliance on cash savings important, delivers long term economic benefits to across Europe, cash and bank deposits amount to 30% of Europe’s citizens as they plan for their futures. total EU-28 household assets, compared to 12% in the US. The focus of the next five years must be to make Investors require cash for a variety of reasons, but, in the meaningful progress in incentivising citizens to use capital long term, European investors
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