Eurofi financial summit addresses EU’s ecological and digital transition

Tue 12 Apr 2022

As a setting for exchange between European Union (EU) economic and financial regulators and senior financial sector executives from the industry, one of the world’s largest financial services conferences, Eurofi, took place in Paris in February. Established in 2000, the Eurofi meetings occur bi-annually* alongside the Economic and Financial Affairs Council configuration (ECOFIN) meetings. The summit in Paris focused on the EU’s ambition of a successful ecological and digital transition by establishing a favourable regulatory environment that would allow Europe a safe growth trajectory and a strong competitive advantage.

According to the European Commission’s (EC) March 2022 publication, to deliver on the set expectations in the European Green Deal and the Digital Compass proposals, the EU needs additional investments of €645bn per year in this decade. This breaks down to €520bn per year for the green transition and €125bn per year for digital. These extra funds should mainly come from the private sector, hence the need for a favourable regulatory environment. This led the Eurofi discussions to revolve around advancement in the Capital Markets Union and completion of the Banking Union in the Eurozone.

Considering the negative interest rate environment

While both the regulators and industry representatives praised the constructive measures European authorities took during the pandemic, the post-Covid priorities and approaches seem to cause some differences. The Negative Interest Rate Policy (NIRP), introduced by the European Central Bank (ECB) in June 2014 and still present in the Eurozone today, was a significant point of interest. The European banking industry named this extra regulatory caution a contributor to a curb on profits and a reason for their lower global competitiveness. One might also argue that NIRP, in combination with the pandemic moratoria, has caused complacency among market participants leading to the dramatic increase in leverage transactions in Europe – an issue behind the Dear CEO letter recently issued by the Single Supervisory Mechanism (SSM).

Addressing European Banking Union gaps

Completing the European Banking Union would allow for mobilising large finance and a less fragmented financial market in the EU. There are several missing pieces in the current legislative framework which received additional attention in the Eurofi panels:

• Crisis management: the existing common European framework for handling EU banks in crisis only covers large systemic banks. Mid-sized banks are too big to be liquidated at a national level and, at the same time, not systemic enough to be resolved at EU level. This existing gap causes stability and distortion risk and requires further action from the authorities.
• European deposit insurance scheme (EDIS): the trust of market participants would be reinforced by this common safety net. Presently member states handle the protection of deposits, and sometimes there are legal divergences that raise the risks in certain countries.
• Integrated banking markets: current fragmentation gets larger due to different corporate, tax, employment and consumer protection laws. For EU banks, this leads to higher costs, and a heavier governance structure, thus hurting their global competitiveness and innovation potential.
• Sovereign exposure: European banks have loaded up on government bonds since the beginning of the pandemic, especially in southern Europe. This can put additional pressure on Eurozone stability and continues to be addressed by the regulators in their evaluation of banks’ risk.

Additional Capital Markets Union proposals

The latest Capital markets union action plan came out in 2020, and in November 2021 the EC offered four legislative proposals:

• The European Single Access Point (ESAP): This legislation offers a single access point in a digital format for financial and sustainability-related information on EU companies. It is governed by the European Securities and Markets Authority (ESMA), and offers broader visibility and accessibility to both EU and international investors.
• Review of the European Long-Term Investment Funds (ELTIFs) Regulation: The goal here is to direct long-term financing to SMEs and infrastructure projects by making ELTIFs more attractive and easier to operate for asset managers, such as the broader scope of eligible assets and greater flexibility in the design of ELTIF.
• Review of the Alternative Investment Fund Managers Directive (AIFMD): The new common rules regarding loan origination, liquidity management tools, and harmonisation of supervision are all included here.
• Review of the Markets in Financial Instruments Regulation (MiFIR): The introduction of an EU-wide electronic system that would collect and combine close-to-real-time trading data for all market participants and enhance transparency in trading rules.

The proposed legislation focuses on presenting a harmonised and unified supervision for the EU capital markets, thus unlocking capital in Europe. Together with the EU initiative for retail investors, the aim is to ensure cross-border investments and provide long-term investment options in Europe. While legislation and initiatives are welcomed by industry representatives, the heterogeneity of the EU market, given different countries, should be considered and might take longer to overcome. 

Developing a culture of sustainable governance

The Global Accord for Sustainable Finance holds an important position in the minds of EU regulators. Hence this topic was central in the Eurofi panels. While facilitating capital and investments in this area is a priority, so is the push toward developing a culture of sustainable governance in both the public and the private sector. The discussions revolved around the first Taxonomy Delegated Act on climate change, which came into force on 1 January 2022 as well as the Complementary Climate Delegated Act, which was introduced by the EC on 2 February 2022. The implementation challenges of these two, together with the data challenges notable in the proposed Corporate Sustainability Reporting Directive (CSRD), were in focus for both regulators and the industry. Given the magnitude of the anticipated changes, in combination with the fragmentation of reporting at a global level, the financial undertakings and their regulators agreed that they must redefine their governance, business model and strategy.

Digital transition to promote financial sector innovation

The digital transition in Europe was another major topic discussed in February in Paris. The regulators confirmed that the EU Digital Finance Package, proposed in December 2020, was an attempt to foster and promote innovation in the financial sector. Still, developments in this area happen extremely fast, and the pandemic has sped up the process further. Are the regulators taking too long to approve regulations that would still need extensions in the future? The conference panels mainly offered further attention to the development of central bank digital currencies and the digital euro. Opportunities and challenges of Decentralised Finance (DeFi) were also on the table – how much decentralisation is “acceptable” for the authorities, regardless of the efficiency, flexibility, transparency and accessibility offered by DeFi systems and platforms?

Eurofi Prague in September

The next Eurofi conference will take place in Prague in September 2022.