Body
The president-designate of the European Commission, Jean-Claude Juncker, has nominated Jonathan Hill, previously a UK government minister, as commissioner-designate for Financial Stability, Financial Services, and Capital Markets Union. The European Parliament has a veto on the eventual confirmation of the whole Commission and has used this right in the past to request and obtain the replacement of individual candidates it deemed unfit. As part of the confirmation process, the Parliament's Economic and Monetary Affairs Committee quizzed Mr. Hill on October 1 and decided to conduct a second hearing session next week. In preparation thereof, President of the European Parliament Martin Schulz sent a list of questions to Mr. Hill on October 2. The 23 questions in that list are copied below.
To enable Mr. Hill's overworked staff to enjoy a rare sunny weekend in Brussels, ready-made answers are suggested here. With due regard to the European Commission's ever-stretched finances and to avoid any possible perception of conflict of interest, they are provided free of charge.1
1. What is your vision of a well-regulated and integrated capital markets union? How do you define the concept, what are its features, and what are in your opinion the three most important elements to achieve a capital markets union?
Well these are meaty questions, so I will make a bit of a longish answer. The concept of the capital markets union is the fulfilment of the Treaty's promise of a single market for financial capital in the European Union. The single biggest obstacle to this vision was the fragmentation of the banking supervisory framework, a crucial one given that banking intermediation represents most of the European Union's financial system. Now that this obstacle is being lifted thanks to banking union, we need to go further in creating a single market for capital. Because London is the hub of the European Union's capital markets, this needs to encompass all EU member states in a way that was not as critical for banking union, as Commission President-designate Jean-Claude Juncker helpfully reminded me in my mission letter .
As with banking union, the features of the capital markets union are about regulation, supervision, and crisis management. In regulation, I will seek to fulfill the Larosière Report's vision of a single rulebook, taking into account the principles of subsidiarity and proportionality with regard to existing national rules that affect capital markets. In supervision, I will review which nonbank financial firms need to be supervised, and for those that need to, whether the national or European level is most appropriate. For example, credit rating agencies and trade repositories are—appropriately, in my view—supervised at the European level by the European Securities and Markets Authority (ESMA). I believe it is appropriate that small audit firms be supervised by national audit regulators, even though I am less sure about firms that belong to the larger international audit networks. Financial consultancies and the like are not supervised at all. I will also review crisis management and guarantee frameworks for those nonbank financial firms that may require a special resolution regime or any other form of intervention process other than court-ordered insolvency in case of failure. I am thinking particularly of financial market infrastructures here, and specifically about central counterparties (CCPs) for which I have promised a recovery and resolution framework in the answers I sent you a few days ago.
As I wrote in these answers, the capital markets union will have to be initiated quickly. But some of its components will take time to elaborate, decide, and implement. I will duly consult and listen before entering into detailed proposals. That said, I can already tell you that I see the three most important elements as being:
- An overhaul of the policy framework for capital markets infrastructure in the European Union. I said during my hearing on Wednesday that I needed to get the plumbing right, so here we go. All market practitioners know that national barriers to sharing infrastructure, aided and abetted by economic nationalism (the promotion and protection of national champions), are a major factor of unnecessary cost and market fragmentation in Europe. I want Europe to have a market infrastructure as efficient, cost-effective, and innovative as in the United States.
- A quantum leap for consumer and investor protection. For example, it is common knowledge that while the European Union has adopted common accounting standards by endorsing International Financial Reporting Standards (IFRS), these standards' implementation and enforcement are not fully consistent across the European Union because of separate national audit firms, audit regulators, and enforcement authorities. I want us to do better than that.
- An unprecedented EU effort on national insolvency frameworks. These need to be reformed and partly harmonized to allow for better financing of fast-growth companies and securitization of small- and medium-sized enterprises (SME) loans. I know this is a political minefield but I will not shy away from the endeavor. Also, to complete the banking union, I will seek the creation of a single insolvency regime for large banks, perhaps as an alternative option to existing national regimes. I believe this can be achieved without Treaty change.
There are other elements of course, such as new rules on securitization, money market funds, and other financial products; a review of possible obstacles to SME and infrastructure financing that may come from our prudential rules (especially Solvency II); and perhaps some work on the taxation of savings, even though I am aware of how difficult it will be to reach any form of harmonization in this latter area.
2. What are the main barriers to creating a capital markets union? What specifically needs to be done for these barriers to be removed? Which ones will you be giving priority and why?
There are all sorts of barriers inherited from the past and maintained by the pervasive economic nationalism that remains a key driver of our policy framework, in spite of all the lip service given by member states to their obligations under EU treaties. To remove such barriers, I need to ceaselessly analyze and expose the costs of market fragmentation and the economic benefits of capital markets development, which require a degree of market integration. Let me stress that the objective is not integration or centralization for the sake of it, but to develop our capital markets for the benefit of all EU citizens.
3. If securitization is to be revived, please outline your view of how it can be made safe and how it will lead to growth and jobs.
Financial activities are based on a tradeoff between risk and reward and can thus never be made perfectly safe—otherwise it is the safety of the graveyard, as they say. I believe the recent joint paper of the Bank of England and European Central Bank (ECB) can be a good starting point for our reflection. I expect to be able to make more specific proposals before the end of 2014.
4. What legislation can be adapted or introduced to support the further development and diversification of capital markets? How would this lead to SMEs gaining better access to long-term funding via capital markets?
One instrument is to legislate on specific products or market segments to make sure they are properly monitored and stay within reasonable prudential limits, such as the Commission's proposal on European Long-term Investment Funds. I will develop more proposals of this kind. However, I believe the framework conditions for capital markets development are even more important, in good Ordnungspolitik fashion as I may say in the language of Master Eckhart. (Or was it Erhard?) Thus my three priority elements as outlined under Question 1.
5. What recommendations would you suggest with regards to digital currencies like bitcoin?
I need more in-depth analytical work on this, and more generally on how technology is rapidly changing the shape of our financial system and the very categories through which we think about finance and regulate it. It is frustrating that people make more mobile payments in Kenya than in most EU countries. I want to be much more ambitious in adapting our financial regulatory framework so that it allows EU citizens to benefit from great new technologies, while providing adequate protection for consumers and against systemic and other risks.
6. What is your opinion on high frequency trading in general and its compatibility with the need to stimulate long-term financing?
High-frequency trading (HFT) is one form of technology-enabled financial innovation. I will consider it in a dispassionate way and will also look with interest at what the US authorities are envisaging in this regard. There are both investor-protection and financial-stability concerns about HFT, which I take seriously but on which I have not drawn conclusions yet. Having said that, our financial system is vast, and it includes many different segments. I don't see why the simultaneous existence of HFT and long-term financing should pose a problem per se.
7. The chair of the European Banking Authority indicated that certain banks might not pass the ongoing stress tests. Should this happen, what action would you take?
We are building up the Single Resolution Board, and it will be ready for the deadlines set by the Single Resolution Mechanism Regulation. That said, in the next few months the responsibility for addressing the consequences of the ECB's Comprehensive Assessment in terms of bank restructuring and resolution remains at the national level. Of course, I will monitor such developments closely and participate actively in those discussions that have a euro area or EU dimension in this respect.
8. Could you provide details on how you see the distribution of responsibilities between yourself and Commissioners-designate Moscovici and Katainen in respect of issues in ECON’s field of competence, as well as the distribution of responsibilities between yourself, Commissioners-designate Moscovici and Dombrovskis, particularly with regard to the external representation of matters concerning the euro area?
I will work with Vice President Katainen under the terms set by my mission letter. Commissioner-designate Moscovici will take the lead on the Financial Transaction Tax and other issues of taxation, but I look forward to working together with him on assessing and addressing any possible impact in terms of market integration and financial stability. The teams that are transferred under my responsibility from the European Commission's Directorate-General for Economic and Financial Affairs (DG ECFIN) will continue to play their important part in the financial sector assessment work of the so-called Troika. The external representation of matters uniquely linked to the euro area will be a task for Vice President Dombrovskis, assisted by Commissioner-designate Moscovici. Any external representation of matters concerning the banking union are for Vice-President Katainen or (more probably) for me directly, as far as the Commission is concerned. And I will do external representation on EU financial regulation, for example in the Financial Stability Board, IFRS Foundation Monitoring Board, etc., the way my predecessor Michel Barnier did.
9. Taking into account the previous commitments of the Commission, are you in favor of a single EU deposit guarantee scheme? Will you make a legislative proposal to that effect, and if so when?
Well, as I am sure you well know, there can be no effective deposit guarantee without a potentially unlimited backstop from a credible fiscal capacity. This capacity currently exists at the national level but not at the European level, and it is clearly not in my area of responsibility to create one. As soon as such a capacity exists, I will make proposals for a federal—oops, single—deposit guarantee scheme that will be backed by it. In the meantime, there is little more I can do than help implementing and enforcing the existing Deposit Guarantee Schemes Directive.
See Part II for questions 10–23.
Notes
1. It should be noted that unlike Mr. Hill, the author has no political affiliations or commitments. Therefore, these prepared answers for Mr. Hill do not necessarily reflect the personal opinions of the author.
