Wishlist for the next Commission for Financial Sector Policies

Between 2024-2029, the next European Commission will surely need to progress towards Single Market in Banking. Since that may be an achievement for the next decade(s), the EU’s executive arm is at least counting on having a resilient, safe, and competitive EU Financial Sector! The current challenges on the dual digital and green transition and the various fragility threats related to macroeconomic adjustments, geopolitics, anti-money laundering and cyber risks will compel the European Commission to put forward an ambitious set of policy priorities for the EU Financial Sector.

We think that Finance in Europe in 2030 will need to look different. Our wish list includes a complete Banking Union, a well-established Capital Markets Union featuring a dynamic EU securitisation market, a clearly defined regulatory perimeter for Non-Bank Financial Intermediation (NBFI), an active EU Financial Sector contributing substantively to the transition to net zero, a transformative shift paving the way for a digital euro that is both cutting-edge and secure, and an effective prevention of fraudulent scandals affecting the EU Financial Sector. But even for the most generous Sinterklaas, achieving these aspirations may pose a considerable challenge.

This commentary comprises an ambitious wishlist for the EU Financial Sector, envisioning a transformed landscape by 2030. We will delve into the details of each wish as we have debated them in Brussels on 6 December.

1. Completion of the Banking Union

While significant progress has been made in this first decade the Banking Union initiated in 2014, there still remains vital work ahead. Looking to the next Commission, we hope for the adoption of the Crisis Management and Deposit Insurance package, aiming to address regulatory gaps in the EU resolution framework. If not too ambitious a request, reviving the EDIS proposal could trigger discussions among co-legislators, drawing insights from the 2023 March turmoil where the role of deposits took centre stage.

As a pivotal component of our wish list, we advocate for an EU Macroprudential Framework Review—postponed twice already—to broaden the macro-prudential toolkit. This entails incorporating borrower-based measures and fortifying the powers vested in the European Systemic Risk Board.

   2. Establishment of a Capital Markets Union and revamping the EU Securitisation Market

To reshape Europe’s financial landscape by 2030, the establishment of a robust Capital Markets Union (CMU) is not just beneficial but imperative. Firstly, a well-functioning Banking Union is inherently linked to the success of a Capital Markets Union. Secondly, the ongoing dual digital and green transition demands reduced market fragmentation and the implementation of consistent rules across financial markets. Hence, it becomes paramount for the upcoming European Commission to champion the development of integrated and resilient capital markets, fostering the efficient allocation of capital throughout the EU.

Despite its potential, the EU securitisation market has yet to reach its anticipated capacity. With necessary regulatory adjustments, a vibrant EU securitisation market operating within the CMU could provide businesses, particularly SMEs, with diversified funding sources, reducing reliance on traditional bank lending.

   3. Clarification of the Regulatory Perimeter for Non-Bank Financial Intermediation (NBFI)

To navigate the dynamic landscape of financial services, establishing a clear regulatory perimeter for Non-Bank Financial Intermediation (NBFI) is essential. The next European Commission must dedicate efforts to delineate regulatory boundaries for what was formerly known as ‘shadow banking activities.’[1] This involves moving beyond the ‘duck test’[2], wherein if non-bank financial intermediaries resemble (look), operate (swim), and function (quack) like banks, they should adhere to similar regulatory standards. Despite potential flaws in this analogy, it is not difficult to understand why the banking industry could defend the comparison.

In anticipation of future developments, we wish that a future EC legislative proposal on NBFI is able to strike the right balance. This proposal should uphold financial stability while simultaneously fostering the growth and resilience of non-bank intermediaries.

   4. Active EU Financial Sector contributing to the transition to Net Zero

In the pursuit of a sustainable future, the next European Commission should prioritise sustainable finance initiatives, actively encourage green investments, and seamlessly integrate climate risk considerations into financial decision-making processes. This urgency is heightened when we recognise that climate change poses not just a localised threat but has the potential to become a systemic risk for the entire EU Financial Sector – or even beyond.

Adhering to the logic of the Brussels Effect,[3] and given the EU’s regulatory power and significant market size, the EU regulatory initiatives on sustainable finance can extend their impact globally. Embracing a public-private partnership model will further empower the EU Financial Sector to play an active and collaborative role in driving the transition to Net Zero, fostering a harmonious synergy between public policies and private sector innovation.

  5. A successful Digital Euro: merging innovation with robust cybersecurity and privacy safeguards

The Digital Euro Legislative Framework – or the Single Currency Package – proposed by the current European Commission has been welcomed by the Eurogroup in October 2023. While the Euro system is actively engaged in exploring and testing the design aspects and functionalities of potentially establishing a retail central bank digital currency, it is important to grasp that the digital euro embodies a transformative shift with far-reaching implications. In our wish list for this ground-breaking development, a prerequisite preceding any decision on the introduction of the digital euro is the indispensable task of fortifying cybersecurity measures and comprehensively addressing privacy concerns. This critical groundwork ensures that the digital euro not only streamlines transactions but does so with a steady commitment to security and privacy.

By establishing a robust and privacy-respecting digital euro, the next Commission, and in particular the European Union stands to its position as a global leader in the expanding digital economy.

  6. Strengthening anti-money laundering frameworks

To fortify the integrity of the EU Financial Sector, the forthcoming European Commission must enact robust measures aimed at effectively preventing fraudulent scandals. Strengthening anti-money laundering frameworks and promoting a culture of compliance will be crucial. Proactive measures can mitigate the risks of financial misconduct, protecting both consumers and the sector’s reputation.

The establishment of the Anti-Money Laundering Authority will play a central role in this endeavour, offering important support to EU financial intelligence units and facilitating the creation of a cooperative mechanism among them. Currently, Brussels, Paris, Frankfurt, Dublin, Madrid, Rome, Riga, Vilnius, and Vienna are all competing to host the new EU Agency, with the winning bidder set to be unveiled soon. This decision marks a significant step in consolidating efforts to combat financial wrongdoing and fortify the resilience of the EU Financial Sector. Yet, this is only the start of an important strategy that the next European Commission will need to pursue.

Conclusion

In crafting this wishlist for the EU Financial Sector for the next Commission, we acknowledge the magnitude of the task ahead. The next 5 years should be used to shape a financial landscape ensuring that it is resilient, safe, dynamic, and responsive to the evolving needs of the European economy. While achieving all these objectives in one go may be a challenge even for the most generous Sinterklaas, incremental regulatory progress in these areas will undoubtedly contribute to a more secure and prosperous financial future for the European Union.

References

[1] The term was used by Paul McCulley in 2007 in a notable speech, but it is hard to argue that he coined it, as the term was already in circulation within academic and policy circles before that time.

[2] The metaphor is usually expressed as follows: If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

[3] Coined by Professor Anu Bradford (Columbia Law School) in her 2012 paper titled “The Brussels Effect,” published in the Northwestern University Law Review.

This commentary was written in the framework of Egmont’s Belgian Presidency Programme. It follows on from the joint workshop series “Policy ideas for the next institutional cycle” organised by Egmont with the European University Institute. The article was first published on the Egmont website.