Letter to the new EU commissioner responsible for financial services

Bruegel, the influential European think tank based in Brussels, publishes a series of documents (“memos”) addressed to the future European commissioners, providing an analysis of the starting point, recommendations, priorities and reflections on the challenges that must be faced in the new political cycle. Among the recommendations sent to the commissioner responsible for financial services, it highlights the need to achieve greater integration in the short term in the supervision of capital markets, don´t neglect the target of completing the banking and capital markets union or to close some gaps generated after the massive regulation on sustainable finance developed in recent years. In this regard, an specific ask should be to clarify how investment in the defence sector should be treated, to reconcile with changed geopolitical conditions.

Main highlights in Bruegel's “memo” to the European commissioner responsible for financial services:

• State of play: Financial services is one of the few areas at European level for which the center of gravity in decision-making is closer to the European Union (EU) than to the states and in which there is a positive political momentum towards greater EU level integration.  Furthermore, the sector is in good health (solid and stable), at least in the euro zone, and appears to have had effective supervision in recent years.
  
  
• Banking and capital markets union: the incompleteness of the European banking union is a structural vulnerability in the EU, which perpetuates the “bank- sovereign nexus” link and entails financial fragmentation between member states. According to Bruegel, although there has been a lot of talk about this without success in recent years, attention should be devoted looking ahead to address the challenge of banks’ concentrated domestic sovereign exposures and to reset the discussion about European deposit insurance. On the other hand, the EU continues to have fragmented capital markets at the national level, below their potential to finance the economy, due to regulatory complexity, which also affects matters considered to be the exclusive competence of member states (for example, taxation, mortgage or insolvency regulations). According to Bruegel, in these matters, the goal would be for member states to end up sharing best practices. An opportunity to progress this project would be to integrate capital markets supervision. To do this, it suggests reforming the current European Securities and Markets Authority (ESMA) in-depth to make it an effective financial supervisor.
  
  
• Other recommendations: Regarding the regulation of sustainable finance, Bruegel recommends clarifying the regulatory definitions of what is considered a “sustainable investment” or “transitional finance”, they are too open and can be a source of misinterpretations (“green washing”), making comparison between entities harder. In less detail, the document also refers to the objective of making the digital euro a reality and the need to continue analyzing the impacts of Brexit on the financial sector, an issue that is not yet closed and on which decisions must continue to be made.