Competitive capital markets, Europe’s challenge

Édouard-François de LENCQUESAING

Chief Executive, European Institute for Financial Regulation (EIFR)

The markets will be instrumental as a significant source of financing for entrepreneurial risk taking. The European financial markets must trigger growth in Europe, insists Edouard-F de Lencquesaing.

As the crisis that placed stability at the heart of the political debate recedes, the question becomes how to recreate a real collective interest in risk? How to relaunch the entrepreneurial spirit throughout the European private sector and share it with the political sector and financial regulators in order to re-establish that subtle and key balance between stability and growth? We are at the heart of the financial industry’s mission. The “risk factory” between entrepreneurs and investors must optimize risk- reward versus mid to long-term capital appreciation.

Up until recently this financing relied upon bank credit and, particularly in France, upon a well- developed risk culture. The crisis, triggered by poorly managed and controlled market mechanisms has affected the classic banking system. As a result, the markets will now have to be instrumental as a significant source of financing of entrepreneurial risk taking. In fact, regulation has now changed our financial model. It is not a mere technical challenge. This change carries profound repercussions for the organization of our society, its risk culture now enlarged to include more actors, and therefore on our value system as well. Isn’t this what is behind shadow banking and crowd funding issues?

An Industry policy for the Financial Sector

In this new context, Europe’s challenge is twofold. It consists of on the one hand deploying an industrial strategy to revive growth while relying upon priority “motors” such as energy, climate, new technology, and on the other hand defining a funding strategy with greater reliance on the markets. The financial industry determines the right balance between the use and the circulation off savings towards targeted growth sectors. This is an essential infrastructure for society: a source of “funds” energy. This “photosynthetic sys- tem transforms this energy into growth factors for both large and small companies. This capacity to efficiently and competitively transform funds into fuel forgrowth is not automatic. It is the result of a context created by vision and policy and from an industrial view of finance in Europe for which the principle of stability can only be a dimension, not the only dimension. Of course, any change in a model requires a transition phase. This carries the accompanying risk of a recalibration of the new parameters and the need for a road map to properly implement them. Every error and hesitation will cause Europe to lose its critical competitive position. Already the size of its financial sector has retreated compared to that of the United States and China. Now is the time to ask real strategic questions. What do we wish from our financial system: European proximity banks? European regional investment banks? Global banks? How do we accompany our European industrial giants in the wave of globalization? How do we accompany our innovation start-ups world-wide? Is the creation of a pool for European investment (such as what originally drove American finance) still important to us? These are strategic questions to ask in order to honestly face the competitive conditions of access to capital and the modalities for its mobilization. To limit our strategy either i) to think that the size of bank balance sheets is Europe’s problem; or ii) to accept a disguised return to the Glass- Steagall Act with the Liikanen Project; or iii) to believe that a financial transaction tax could both complement the existing regulatory framework making markets more responsible, and contribute to the solution of public finance deficits, would be to miss an important step in our strategic reflection.

Essential Initiatives

The calibration of this regulation that emphasizes capital (CRD4, Solvency2…) as a source of stability, as armour-plating in the battle against risk, should better take into account other defense points potentially less costly for our productive economy: surveillance and risk culture. The Banking Union, banks restoration and resolutions mechanisms are essential initiatives that contribute to this protection. They will restore credibility and will contribute to optimize the costof financial resources allocated between prudential capital and surveillance; it will also mitigate extraterritoriality temptations from countries that refuse to trust our surveillance processes. Interestingly enough as a condition to increase market efficiency between the US and the EU it justifies the introduction of financial regulation in the “TTIP” negotiation.

Vision, balance, responsibility, these are the conditions for a constructive dialogue between regulators and the private sector to make European finance and the market a trigger for growth and European competitivity. We are almost there!