Investments|The managers of Finnish banks warn that the expectations towards the so-called capital market union may be exaggerated.
Brussels
in Europe there is a problem, and the name of the problem is lack of investment. Too little investment in production, product development, research, infrastructure – everything. It can be seen as weak growth, but it also jeopardizes goals related to strengthening defense and reducing emissions, for example.
The annual investment deficit is estimated to be around 800 billion euros.
There would be money, even in Europe. The value of private savings is estimated at around 33 thousand billion euros. However, a large part of the money lies in the accounts, and is not sought after the riskiest items in search of income. And even when households invest, a large part of the money is put into the US market.
The situation was grim when the former President of the European Central Bank Mario Draghi in September published its long-awaited report on European competitiveness. One of the main messages of the report was that if Europe does not quickly get investments going, it will lose the race against the United States and China.
But No problem! It is up to Draghi to offer a solution, and it is called a capital market union.
According to Draghi, a big obstacle to European growth is that financial markets are still very national. Capital does not flow freely across borders. The Capital Markets Union covers a large number of different proposals to break down barriers.
The idea is not new. Presentations were already made ten years ago, but the negotiations have stalled. Now the mega-project has been dug up from the back of the shelf in the hope that the acute concern about Europe’s decline would bring new momentum to the negotiations.
That seems to have happened. The project has broad support across political divides. The Finnish government is enthusiastic about the capital market union, because it hopes that this way discussions about public investments financed by joint debt can be avoided.
There are now high hopes for the Capital Markets Union. Chairman of the Commission Ursula von der Leyen has said that removing barriers to capital markets could increase annual investment by up to 470 billion euros.
Finland the largest banks OP and Nordea are not as excited about the project. They have a particularly tight-lipped attitude to the idea of centralizing supervision at the EU level.
According to Draghi, the fragmentation of supervision and rules is the main reason why the European capital market does not work. National authorities are responsible for supervision, in Finland the Financial Supervisory Authority. According to Draghi, the EU should have one strong market supervisor, similar to the US SEC.
OP and Nordea oppose this.
“We need a functioning internal market, but if we think that the biggest problem in our capital market is that we don’t have a single regulation and centralized supervision, then I don’t think that’s the lack that would solve this matter,” says OP Group CEO Timo Ritakallio.
According to him, the market needs harmonization of rules, but not centralization.
“It’s terribly difficult to take into account the national peculiarities that exist in the market.”
According to Ritakallio, the centralization of supervision could endanger, for example, housing-backed bonds that are widely used in Finland. A Finnish housing stock company is a foreign concept in the rest of Europe. Banks use these bonds a lot in their own fundraising.
Experiences from joint banking supervision confirm this concern, says Ritakallio. Europe’s largest banks, including OP and Nordea, were placed under the supervision of the European Central Bank after the financial crisis.
“We have concrete experience of what it is.”
Nordea’s director responsible for personal customers is on the same lines Sarah Mella. According to him, the danger is that the pursuit of harmonization that goes too far will harm countries where capital markets have already developed. He uses Sweden as an example.
“It would be important to bring harmonization, but we should not define individual products in each country.”
Both are of the opinion that the entire capital market union is now too much of a regulation-driven project. Less is said about how households would be encouraged to invest.
“Incentives are very little involved in the discussion [kannustimet]which would promote market-drivenness,” says Ritakallio.
Taxation is in the hands of the member countries, and Mella says that Finland should also think about incentives for voluntary pension savings, for example. In the spring, the government removed the tax benefit for voluntary supplementary pensions.
“In Finland, there is no need to wait for what will come from the EU,” says Mella.
Second one of the top projects of the new commission to boost European economic growth is deregulation. Von der Leyen has promised to lighten the regulation of all companies by 25 percent and the regulation of SMEs by 35 percent.
“It would be a huge stimulus for the European economy,” says Ritakallio.
He says that EU regulation has also hindered the development of the capital market, as increased reporting obligations have reduced companies’ desire to list on the stock exchange.
Banks also hope to be part of the easing of regulations. After the financial crisis, banks’ solvency rules have been tightened several times. The supervisor’s requirements and, for example, new responsibility reporting obligations will come into play.
“We have lost the overall picture of how regulation coming from different directions works together,” says Mella.
According to Ritakallio, an overall assessment of the regulation targeting banks should now be made at the EU level.
“In that context, it would be good to assess whether the regulation related to solvency has indeed created obstacles to growth.”
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