Following are excerpts from the unofficial transcript of a CNBC interview with Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union aired on Monday 7th September.
CNBC: Define capital markets union for me in one sentence?
At its most simple, what I'm trying to do is to make it easier to connect savings with growth … short sentence for you.
CNBC: We'll break it down from there. My understanding is we want broader sources of funding beyond the banks effectively so we don't go back to what we had during the financial crisis, and beyond where collapse in lending means a collapse in growth.
I think that's spot on. At its most simple we've got a system in Europe which historically has been very dependent on bank financing, much more dependent on bank financing that would be the case in the United States. And so I think that if we can diversify our sources for funding first of all we get more capital for businesses that want to grow hugely important for SMEs in particularly. I think that it will help also to increase the opportunities that citizens have for their savings because we've got a demographic problem, an ageing problem, people need to save more for their old age. And I think it would help also with spreading financial risk. We've seen in Europe – as you say over the last five years - if you've got a system that's very dependent on one source of funding, and you have a contraction in bank funding like we had, then we have a very real knock on to the economy. And I think if we can diversify and spread it, we can help also achieve a greater degree of financial stability.
CNBC: If we look at cross border risk sharing, it's gone backwards since the financial crisis. Securitisation, getting some of that risk off balance sheets so banks can re-lend hasn't picked up and the European central bank was going to be buy abs and it's bought what, 11 billion euros - it's peanuts. So I can see many obvious barriers to the growth of this and the recovery of this market.
Yes I think there are a number of barriers and the approach I'm taking with it is to try to identify those barriers one by one and work through them, coming up with solutions. It's going to take a long time. This is a long-rooted, deep-rooted challenge – it goes back 50 years. If you take securitisation as a good example, I'll be bring forward proposals in just a couple of weeks aimed at encouraging and rebooting the securitisation market in Europe to try to put in place a framework to encourage simple, transparent and standardised securitisation and then we'll have to look at other a whole range of other factors like insolvency law, to the tax treatment of equity as opposed to debt, and work through them over a period of time and try to come up with solutions.
CNBC: I mean if we look at that… just to pick out one point there… the bank insolvency laws. If I look at Greece, it takes between 5 to 7 years, I know the Italians are trying to tackle it, but it's around 5 years at the moment. I mean just even that point, trying to standardise that across Europe. It seems like an insurmountable task.
It's clearly not a straightforward task. And that's why my approach so far has been to be ambitious about where we're trying to get to, to be clear about what the programme needs to cover, to start with some of the things where I think there's broad agreement that we need to move– so there's broad agreement on securitisation, there's broad agreement that we need to have a radical review of how we do the prospectus, our prospectus directive which has become too cumbersome, too costly, there's broad agreement that we need to venture capital going, and then if you get support for that, you build momentum ,you grow confidence. And then you can help people, I think, over time see these really knotty problems like insolvency, well then we need to have a go at that as well.
CNBC: So once they can start to see something working, perhaps they'll give a bit more ground. I mean the financial system at the moment provides I think around two trillion euros to SMEs. But if we look at non-bank financing in Europe, it's less than half of that that's provided in the US. And there's a gap isn't there… and that's where we need angel investment, we need venture capital, we need crowd funding as well. How do you tackle this?
Well again… I have a fairly pragmatic approach to this, which is to try and break it down and unpack it just the way that you have and try and come up with ways of improving the situation for each of them. And you've put your finger right on it. We've got lots of very good new ideas for new businesses, for innovation in Europe, and they are going to the United States for funding… whether it's for private placement or venture capital, or whatever it is. And I think that it would be good if we could get more of those sources of funding coming from within Europe. So that's why we'll be making a priority of looking at venture capital, I think crowd funding is an interesting area, still small, and there my instinct with crowd funding is this is something that's emerging rapidly, particularly in some markets on its own accord, and I think we've got to be careful not to regulate too soon on something like that, that might actually have the unintended effect of choking off that growth. But clearly that's another area that we need to look at.
CNBC: You tied the idea of using savings to push growth going forward. Is this also about allowing capital to access other areas perhaps where the capital market unions aren't so developed in Europe to tackle the areas that don't have the benefits of that, for growth, for competitiveness in particular?
I think that's exactly at the heart of it. I see this very much as what I call a classic single market project for all 28 member states. And I think some of those that could benefit most from it, are those that have the least developed capital markets. And I think if we can develop a system whereby capital can flow to where it's most wanted across borders that would be to the advantage of those who have capital in developed markets, but it would also be to the advantage of those that have the least developed markets. To do that we need to look at again a whole range of issues… the whole question of SME credit information for instance… how do investors sitting in London make judgements about the quality of an investment in Romania. Again it will be a comprehensive package that will try to address these things and come up with solutions to them over time.
CNBC: And where does the money come from because if we're looking for an obvious long-term investor with a deep balance sheet, then we're already seeing a little bit of it in Europe… the pension funds looking to give this money, the life insurers also looking for possible opportunities, investments in a low-rate environment. Is this a potential source?
Yes both, very much so. And again, I think that's why one of the things we're looking at for the insurers is the calibrations on Solvency II to see whether we can see if we can make it more attractive for them to invest in infrastructure and other assets. I think the pension funds absolutely would be a typical source, but it's also why when we're thinking about it, we've got to look at the issue of how you get the normal retail investor to want to invest more of their money in pensions, into insurance… then they can put that into the growth projects. So this isn't just thinking about it from an institutional point of view, but also from the point of view of how do savers have confidence to invest in financial products… the proceeds of which can then be re-invested in growth across Europe.
CNBC: The idea of this reform… it all sounds very plausible and very necessary, but it kind of sidesteps the thorny issue of this idea of centralising capital markets supervision, because when we can't agree in Europe over things like Greece, over the migrant issue, particularly when it comes down to the financial sector, where particularly in the UK is touchy shall we say – how do you bring all 28 countries on board?
Well, I think first of all, I've worked very hard to build support from all 28 member states for the idea of capital markets union. And I'm glad to say that.
CNBC: On paper [LAUGHS]
The position we are in is that they are backing it strongly, as actually is the European Parliament. And the response that I've had from the industry has been hugely positive as well because I think they see the benefits of this. So I think we're in a good place on that.
CNBC: And the UK?
The UK is very much behind it as well and I think businesses in the City of London can see opportunities and you know, make the analysis, that at the moment, the market is fragmented and if you can have a more unified market, well that should make sense for everyone. So politically, there is a lot of support. I think from the member states there's a very clear view that the way we need to go at it is the way that I want to go at it, which is step by step, building it from the bottom up… attacking some of the issues where there is agreement, where we can try and make some quick progress, and then moving on. And I think supervision is a good example of that. There's been changes in recent years, 3 or 4 years ago to the whole supervisory structure. The feedback we got from our consultation is that people think that works well and it needs to have time to bed down. There are probably ways you can make it work better, but let's chip away at that rather than thinking that you need to leap to one simple, single European supervisor.
CNBC: Interesting that you mention the single European supervisor. So a lot of the criticism about the banking union is that it's incomplete, that there's a flawed process. What you're saying is you're trying to learn from that experience in a sense and go very much bottom up in this process of building the capital market union…
Well I think two things… I think there is more work to do on the banking union, and that's something we're looking at as well. But my instinct on this has always been to try to build it from the bottom up, and that maybe reflects my outlook on life and how I approach politics and I approach business. But as I say I think that approach has had a lot of support and I think people see that as providing a good basis for what is going to have to be a long-term project. I mean this, this goal of a single capital market was set out in the Treaty of Rome nearly 60 years ago so I don't feel too bad if I take a few more years, but I am confident that by the end of this commission that we would have made lots of progress, that the building blocks for further progress will be put in place, because I think there is an appetite for it, and I think the political climate has changed. I think you would have said a few years ago in Europe if you talked about the idea of strengthening the role of capital markets you might expect in certain quarters of Europe that you'd get a bit of a raspberry to that idea… and we've changed from that. And that I think gives us a very good basis on which to build.