Money Talks: EU Commissioner Jonathan Hill on how Europe can recover from the financial crisis
Jonathan Hill talks to the Parliament Magazine about the banking industry, the capital markets union and why we need better regulation.
The famous US industrialist Henry Ford once said, "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Massive government bailouts, protests by the Occupy Movement in Wall Street, New York and the City of London have battered the reputation of the banking industry over recent years.
To many, they are viewed as the cause of the financial crisis and most of Europe’s economic problems.
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Despite this, EU Commissioner for financial stability, financial services and capital markets union Jonathan Hill, still believes the banking industry can play a major role in Europe’s economic recovery by supplying much needing funding to Europe’s entrepreneurs and SMEs.
He says "We need strong financial markets alongside a strong banking system so that we can improve the funding conveyor belt for Europe’s businesses."
Post the financial crisis, banks are still considered one of the major sources of business funding. However, the British official recognises that alternative sources of funding are now needed.
"If you have a financial system that is heavily dependent on one source of funding, you will get hit if that source of funding dries up…it makes sense to have more than one string to your bow."
Hill is scared that if start-ups cannot access financial funding in Europe, they will move to the US.
This is why the Commissioner sees the capital markets union (CMU) action plan as a way of encouraging different sources of finance," whether it is venture capital, angel investing, crowdfunding, private placement and loan-originating funds."
The former UK government Minister sees the CMU as a major plank of Junker’s plan to boost infrastructure investment within Europe, by raising new forms of private financing.
One key untapped source of financing with the potential to raise billions in investment is the insurance industry.
"The insurance sector has almost €10 trillion to invest in the European economy; I am keen that it can throw more of its backing behind European infrastructure."
By contributing towards investment infrastructure, and helping European SMEs access more funding, the CMU action plan is seen as sustaining economic recovery.
It will make the whole financial system stronger by "diversifying away from traditional dependence on banking. This will lay the foundations for a healthier and more sustainable European economy."
Following the global banking crisis and the financial catastrophe within the Eurozone, Hill is keen to underline that the EU has taken steps to avoid possible future market failures.
He points out that since 2008, when the Lehman Brothers bank collapsed, the banking sector has had to strengthen their defences by increasing their capital base.
"We have a greater capacity to manage banks that get into trouble through the recovery and resolution framework."
One of the key tools the EU can now use is the single supervisory mechanism (SSM) which means they can supervise banks within the Eurozone who are too big to be supported by just one member state.
The Commissioner also points to significant steps taken to strengthen the EU regulatory framework for financial services outside the banking sector, in particular those covering the market in derivatives and securities, through the European market infrastructure regulation (EMIR).
Meanwhile, the markets in financial instruments directive II (MiFID II) and the alternative investment fund managers directive (AIFMD) regulates the conduct of financial traders, investor protection, market abuse regulation and fund management.
Hill is keen to point out that he believes that "Europe is in a much better position now to withstand a crisis than it was before."
When asked as to how he will make sure companies are not burdened with expensive administrative costs, especially nonfinancial firms or SMEs, Hill stresses the need to, "strike the right balance between reducing risk and enabling growth."
However, also Hill stresses that his approach to financial regulations, "is that that they should be evidence-based and proportionate."
While he admits the EU must remain vigilant towards risk, he adds" we also need to remember that no risk equals no-growth."
In September this year, Hill launched a public "call for evidence", seeking feedback on the cumulative impact of EU regulations over the last few years. This looked at the benefits, unintended consequences, consistency and coherence of EU rules.
He thinks that, "this is in line with the ‘better regulation’ approach of the commission, led by Frans Timmermans, and also incidentally work going on in the financial stability board."
For Hill, the aim is to, "check whether the rules added together have resulted in unintended consequences or could have achieved their intended objectives more effectively."
Responding to a number of MEPs who have been critical of some his proposals for reducing the capital requirements that insurance companies and banks should hold, he points out that these reductions have been based on the advice of the European Insurance and Occupational Pensions Authority (EIOPA).
Underlining the political importance Brussels places on the CMU, the Commissioner points out that the council has made rapid progress on backing his proposals on ‘securitisation’ for banks, aiming for an agreement by Christmas.
Summing up his overall strategy towards the introduction of CMU, Hill states; "The need to build early momentum is exactly what lies behind my overall approach on CMU; long-term ambition combined with immediate concrete measures, building up over time, step-by-step."
He also wants to free up bank-lending in the wider economy by bolstering securitisation markets in Europe (the financial practice of pooling various types of debt such as house mortgages, commercial mortgages, car loans or credit card debt obligations, and selling them to third parties as securities) in Europe.
"If we can rebuild securitisation markets to pre-crisis levels we could add an extra €100bn of investment for the whole economy."
But he is keen to point out that his new policies are "not to encourage a return to the bad old ways of the past," adding that the newly introduced safeguards will, "identify when securitisation is simple, transparent and standardised, with the need of the originators (of the debt) to retain some risk."
Hill also stresses that he is seeking advice on how to proceed on capital requirements from the European Banking Authority, the European Central Bank and the Bank of England. However, he recognises the need for MEPs to provide their input.
"Of course I recognise that there will be a need for debate in the parliament and Council. But we are making good progress…"
He recognises that some of Europe’s leading financial and banking centres, such as the City of London, Frankfurt and Paris, trade globally and not just within Europe.
He says, "we will follow and shape international debates on regulatory standard-setting but also be sensitive to the need of the European economy."
The Commissioner does not only want to attract capital from within Europe but also from outside.
"The CMU action plan is about knocking down barriers, not putting them up. By removing barriers to the single market, CMU will make the EU more attractive to third-country investors."
Hill has plans to develop alternative European financial markets outside the big three of London, Frankfurt and Paris by using structural reform support and technical assistance.
However, Hill will also be working with the international financial regulation bodies, such as the Financial Stability Board and the International Organisation of Securities Commissions, to support the development of global capital markets.
Recently, the UK Chancellor of the Exchequer, George Osborne, gave a speech in Berlin that sang the praises of the CMU. Even though talks of a possible Brexit dominate British politics, Osborne pointed out the potential of CMU in providing a financial boost to Europe’s businesses, particularly SMEs.
He contrasted the new action plan with some of the other EU’s financial regulations and rules, which he claimed had made the continent less competitive to run a financial services business.
Hill fully supports his fellow Conservative’s assessment of the CMU, stating that, "The CMU should be good for consumers and businesses across the EU." On regulatory burdens, however, one year into his role Hill highlights how the commission has been ruthless in reducing regulation.
"We cut the number of new laws by 80 per cent in our first year and will do so again in the next year. I am following the same approach in my area of responsibility."
Ultimately for Jonathan Hill, although a well-regulated system is needed is within Europe, he also points out that, "we have to be aware of international competition. That is another reason why, where there is global competition, it makes sense to try to agree rules governing financial markets at a global level."
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