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17 October 2019
Economic and financial affairs News

Ensuring health of European finances

Strengthening the Banking Union and Capital Markets Union is a key priority in the legislative work pursued by the Romanian Presidency of the Council of the European Union. 12 legislative files on financial services have been closed after long and constructive negotiations with the European Parliament.

An important achievement is the reviewing of the functioning of the current European system of financial supervision (ESFS), which marks a major step in modernizing the way financial institutions are supervised in Europe. The European Banking Authority will now have real powers to tackle money laundering and the issue of terrorist financing. This should enable greater convergence between member states and decisive action in the EU.

Also, after more than two years of negotiations, the EU will soon have in place a more robust framework to regulate and supervize banks, by transposing a number of revized risk-reduction measures. In concrete terms, these measures will ensure that the banking sector holds enough capital to lend safely to consumers and businesses and, at the same time, that taxpayers are shielded from any difficulties which banks might be facing.

Ahead of the future trilogues with the European Parliament, the Council agreed upon new harmonized rules on the development of secondary markets for non-performing loans (NPLs), which would allow banks to manage or more easily sell bad loans. Reducing the existing stock of bad loans in the banking sector and preventing their accumulation in the future is essential to guaranteeing the stability of the EU’s financial system.

The aging of Europe’s population is a challenge that requires adapted solutions. New legislation has therefore also been agreed on the Pan-European Pension Product (PEPP), a new class of personal pension schemes, that will provide greater choice for people who wish to save for their retirement, and boost the market for personal pensions. PEPPs relieve the pressure on public funding and also have the huge advantage of pooling all savings in one single personal pension plan, regardless of where they were initially made in Europe.

Further steps were also taken to give easier access to new sources of funding for small and medium businesses trying to list and issue securities on financial markets, while safeguarding investor protection and market integrity. SMEs are the largest contributors to jobs and growth in Europe. However, they greatly depend on bank loans for their funding. That’s why it is crucial to actively help SMEs diversify their financing sources and provide them with simpler, easier access to capital markets.

From now on, the rules applicable to investment firms will be differentiated according to size, nature, and complexity – and in line with the level of risks they undertake. Investment firms play a crucial role in facilitating savings and investment flows in the EU. If they are to play their full part in the Capital Markets Union, it is essential that the rules applied to them are risk-proportional and tailored to meet their specific business requirements.

Right now, the EU institutions are applying simplified rules to non-financial counterparties, small financial counterparties, and pension funds using financial derivative products. This will upgrade the framework on more transparency and reducing systemic risk in the derivative market as put in place by the EU in the aftermath of the financial crisis. The targeted adjustments will preserve all the core elements of the reform, whilst simplifying the rules and making them more proportionate. At the same time, supervision of central counterparties (CCPs) established in third countries and in the EU will be significantly strengthened. The European Securities and Markets Authority (ESMA) will be entrusted with supervisory powers that could allow it to require third country CCPs, deemed systemic for the EU, to be subject to enhanced prudential requirements. ESMA could also request, as a last resort, that third country CCPs relocate their activities in the EU, should it prove necessary to address systemic risk and financial stability of EU markets. ESMA will also be involved in the supervision of EU CCPs in order to enhance supervisory convergence of CCPs with cross-border footprint.

The cross-border distribution of investment funds will provide businesses with simpler and faster access to funding sources across Europe, eliminating current regulatory barriers and making cross-border distribution less costly.

The transition to a low-carbon, sustainable economy requires the rethinking of business-making. The creation of a new category of financial benchmarks, aimed at providing full information on an investment portfolio’s carbon footprint, will make it easier for investors to select climate-conscious projects, infrastructure and technologies, so as to reorient capital flows toward green assets.

A transparency obligation on how financial companies integrate environmental, social and governance factors in their investment decisions will also be put in place. Redirecting money toward greener, cleaner, and more sustainable projects requires greater awareness by all market participants of the long-term impact of their investment decisions.

The EU supports lending by providing easier access to mortgage and public sector loans, which from now on will be facilitated by putting in place a harmonized framework for covered bonds, based on a common definition and specific benefits from preferential capital treatment. Covered bonds are an efficient source of financing the economy, which ensure a high level of certainty for investors and are an important tool for stimulating the development of the Capital Markets Union.

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