It is evident that the European Commission has achieved many legislative updates in the last five years as a direct result of its goal for a further deepened and integrated European Capital Markets Union (CMU) and that the CMU shall remain a high priority for the next Commission.
One of the aims of CMU is to increase sources of funding and lower the cost of raising capital for all businesses but mainly small-and-medium-sized enterprises (SMEs). SMEs represent between 20-50% of the total client loan portfolio of co-operative banks, making such banks key players in financing the real economy. In turn, SMEs still mainly find access to funding through banks rather than capital markets, and such SME financing works better in jurisdictions with more decentralised and retail-focused banking structures (source). The co-operative banking model provides this advantage.
The EACB believes that despite certain political hurdles that prevent true integration of European capital markets (e.g. differences in national tax and insolvency rules), there are certain regulatory issues in the sphere of securities markets legislation that need to be addressed in order to achieve the goals of the CMU (particularly in the context of co-operative banks and their link to smaller firms/retail clients):
- 1. Reduce complexity and increase efficiency in securities markets legislation
There was a huge boost in new or updated securities markets legislation following the financial crisis, which was necessary to increase consumer protection and reduce risk in the market/economy. However, these objectives are not being fully met due to the lack of harmonization between the different types of legislation (e.g. MiFID/MiFIR, EMIR, PRIIPS, CSDR, SFTR etc.), as well as, complexity and issues of proportionality in their implementation. In particular, concrete actions are required as a matter of priority in the following dossiers/regulatory areas: (i) reporting requirements; (ii) MiFID II/ MiFIR; and (iii) PRIIPs Regulation.
- 2. Ensure that regulatory developments do not affect financial stability
This relates mainly to developments in the Benchmarks Regulation (BMR) which has led to the evolution in methodologies for calculating the current critical benchmarks: EURIBOR and EONIA. The transition to the new/revised benchmarks may affect the pricing of legacy contracts. Such scenario presents civil law issues as clients might not be able to understand nor accept that this pricing change is related to recent EU legislation. This increases litigation risk for banks and puts the entire EU banking system under financial pressure, thus threatening financial stability. Furthermore, EURIBOR and EONIA serve as the basis for the pricing of a huge percentage of banks’ assets (and even some liabilities) with consumers, thus affecting even more retail banks due to their close relationship with consumers. Such situation is not ideal since the impact to financial stability in the EU should be taken seriously. Therefore, we call for a legislative tool that would provide legal certainty for the transition to new benchmarks (revised EURIBOR and €STR) in already-existing financial contracts.
- 3. Take into account the impact of the various sustainable finance legislative work-streams on banks
Co-operative banks will be captured under various regulatory work streams when it comes to sustainable finance: prudential, taxonomy, disclosures, etc. Therefore, the EACB recognizes that terms and rules applied in the different texts might demand different approaches from one another. This should be allowed only insofar as this reflects the different ways of financing: capital markets financing vs. bank financing. Furthermore, the EACB is also aware that the taxonomy is focused on ‘sustainable economic activities’ rather than on products/entities, which makes sense in project financing but not in capital markets (through investment in a bond or equity, for example). Thus, there is the need to: (i) address this market gap and create a harmonized classification system applicable to sustainable products/entities; and (ii) make it clear that in the final stage of the taxonomy, all “ESG-criteria” are adequately contained, as for the time being market participants are faced with a taxonomy solely covering environmental criteria.
Further details are provided in the paper.