European UnionCompetitionSustainable finance

Using the crisis as an opportunity for more integration

Kolja Gabriel

The spotlight couldn’t be brighter, expectations couldn’t be higher: when it took over the Council Presidency on 1 July 2020, the Federal Government was given the historic task of navigating the European community of states through its choppiest economic crisis since the end of the Second World War. It will need to do its utmost to quickly find a compromise to the Commission’s multi-billion euro recovery package. The Federal Government believes its key challenge over the next six months will be to stimulate the economic recovery of Europe as a whole. 

However, this doesn’t mean that Germany intends to neglect the other major challenges of our time during its presidency. In fact, both digitisation and climate protection will play a key role in Germany’s economic rebuilding programme. And rightly so. Making the EU more competitive in the long term, as the Federal Government has firmly committed to do, won’t be possible without making considerable progress on these two megatopics. And don’t forget, the small matter of reaching a trade deal with the UK is also on the agenda for the second half of 2020; without an agreement in the coming months we are headed for a hard Brexit on 1 January 2021. There will be a lot of work for the Federal Government to do in the decisive weeks leading up to that date. 

The banks, who play a key role in overcoming this corona-related economic slump by granting loans to many enterprises, believe that the next six months will be particularly crucial. This period must be used to set Europe on the right course. What do private banks see as especially important? What should be implemented or initiated as quickly as possible?

Putting financing the economy centre stage

For some time now, the deepening of European capital markets union has been a project that Brussels has continuously worked on without achieving any great breakthroughs – now it has become even more urgent than it already was. The EU’s capital markets are still fragmented and underdeveloped to this day and this has become a major impediment to efforts to breathe new life into the European economy. However, the final report of the European Commission’s High Level Forum, whose findings will be included in the Commission’s action plan announced for the second half of the year, now promises to give fresh impetus to the policy.

We believe it is essential that standardised EU-wide processes for clearing and settlement and asset servicing not only promote an investment culture but also increase efficiency – they must therefore be implemented quickly; the capital is sorely needed. We especially need to strengthen the securitisation market. High-quality securitisation tranches, which proved to be safe even during the financial crisis, should not be put at a disadvantage over other financial products. They act as a much-needed bridge between bank loans and the capital market. In addition, synthetic securitisations should be included in the European securitisation framework and be able to benefit from appropriate risk weights. As regards direct banking transactions, the way to encourage cross-border business would be to establish capital and liquidity waivers, so that capital and liquidity can be moved more easily between parent companies and their subsidiaries. This is the only way for banks who are active in Europe to truly become European banks.

In addition to capital markets union, now is also the time to press ahead with banking union and, in particular, further standardise prudential rules for banks (single rulebook). As Olaf Scholz, the Federal Minister of Finance, has said himself, efforts to rebuild the economy will reap the maximum benefits from a stable and consolidated banking and capital markets union. It would be hugely important if the Federal Government were to use its influence and achieve real progress on this matter in the coming months.

Financial market regulation – increasing lending capacity

Given the unprecedented nature of the current economic crisis, there has already been some regulatory relief introduced by the supervisory authorities, the Commission and by parliament which has proved helpful in enabling banks to provide enough capital to finance the economy. But this raises a fundamental question: what regulations do we need to amend to ensure there are no procyclical effects and banks can act as reliable lenders even in such exceptional economic circumstances? What conclusions should we draw from our experiences in recent months? And how can we urgently increase the lending capacity of our banks?

First of all, much of the Commission’s planned legislation for the finance sector is being submitted later than originally planned – this is unavoidable and, in some cases, it is right and proper. Postponing the planned implementation of the Basel banking standards, for example, is certainly helpful under the current circumstances. It will help banks by providing relief from additional administrative tasks and capital-intensive requirements, which is especially important right now. But even when Basel is eventually implemented, the right balance is required to ensure that the banks’ European business models are not unduly burdened.

To ensure the banks can remain strong partners for businesses in these turbulent times, additional relief would be sensible and necessary. For example, suspending this year’s contributions to the Single Resolution Fund (SRF) would give the banks considerably more lending capacity. And the SRF would suffer no “damage” as a result of this one-off measure since banks would still have to go on paying contributions until the SRF reaches its target of at least 1% of covered deposits in the eurozone – it would simply mean postponing everything for a year.

A standardised approach to digitisation needed in the EU

We warmly welcome the Federal Government’s decision to define the realisation of digital financial market union as an objective of its Council Presidency. This is where it’s all happening today – and tomorrow even more so. In this digital context, Germany’s Council Presidency is striving to ensure that, among other things, payment services are adequately supervised and that the major payment service providers are generally under financial supervision. The lessons learned from the Wirecard case highlight the fundamental challenge: in order to avoid becoming dependent on developments in third countries, we need a standardised Europe-wide market with standardised Europe-wide rules, which are not only technologically neutral but which apply to all providers of comparable products and services equally – be they banks, fintechs or bigtechs. Particular attention should be paid to the major international internet platforms, which currently enjoy certain regulatory advantages. Subjecting the banks to more regulation than other providers contradicts the principle of fair competition and is unacceptable. It is therefore vitally important to reform EU competition law.

European legislators must also create the conditions under competition law to enable pan-European payment solutions. New technologies have created exciting opportunities to establish efficient and diversified European payment systems. Instant payment solutions, which allow customers to make electronic payments anywhere in Europe within seconds, are increasing Europe’s independence in the world. The required infrastructure already exists; member states should now press ahead with developing interoperability standards between the various technologies.

Europe-wide standards for payments and fairer competition between processes and providers are also very important when it comes to a sustainable digital monetary system. More specifically, it is about introducing a digital euro, which is not imminent in the coming months, but which the Federal Government intends to campaign for during its Council Presidency. A programmable digital euro using accounts and crypto-technology will be indispensable in the medium term for preserving European sovereignty over monetary and economic policy. It is right that the debate about this topic has gained traction recently. 

From data protection to cybersecurity and standardised KYC processes, further digitising the European financial sector will be essential for the entire economy and requires a pan-Europe thumbprint. In the global digital competition, Europe will be given nothing for free; which makes it all the more important that it builds on its strengths and ups the ante in those areas where it risks falling behind, such as artificial intelligence. 

Paving the way for the Green Deal and sustainable finance

Last but not least, the European Green Deal – a Herculean task for the EU. But time is fleeting and there must be a rapid increase in sustainable activities in all sectors of the economy, especially in manufacturing. And the banks play an important role in financing and supporting enterprises on their path towards an age of zero emissions.

In order for us to forge ahead towards new dimensions in sustainable financing, cooperation between the public and private sectors will be essential. And, in doing so, joint financing opportunities and the integration of sustainable finance into funding structures will create additional incentives. The Commission’s corona recovery plan is certainly headed in the right direction. The measures required to support the economy during the COVID-19 crisis give us a unique opportunity to deliver structural change and to link the recovery with the aims of a sustainable economy and society.

The private banks believe that European legislation should send a clear political signal that puts the financing of sustainable investments and sustainable consumption centre stage in future – despite or even because of corona. Lower capital requirements for the corresponding loans might be one option to consider. It is true that sustainable lending is not low risk per se, so it should not be linked to the underlying risk of the loan. Low capital costs, however, would increase the profitability of sustainable investments, thus encouraging banks to grant loans for sustainable projects and encouraging people to apply for them. “Green securitisations” might be used to bundle these loans (e.g. to private households for energy-saving measures), thereby involving the capital market, which is needed as a source of financing for larger volumes.

The way ahead

In summary, the Association of German Banks believes that Germany’s Council Presidency should use the current crisis to press ahead with further EU integration, particularly with regard to making progress on a single financial and banking market, and to link the recovery with ambitious goals in the areas of sustainability and digitisation. It will also be an opportunity to strengthen the EU’s international role in politics and trade and Europe’s influence as a global rule-maker.