Paris, 13 November 2012
MEDEF
55, avenue Bosquet
75330 Paris cedex 07
France
Registration Number: 43763731235-75
EUROPEAN COMMISSION
Directorate General, Internal Market and Services
BRUSSELS
MEDEF would like to thank the European Commission for the open consultation on the High-level Expert Group’s report on structural reforms to the European banking sector which provides it with an opportunity to express its opinion on the matter.
It commends the work carried out by the Group of high-level experts, and particularly notes the willingness to offer a “third” option for the future European banking model, different from the approaches adopted variously by the United States of America and the United Kingdom, and reasserts its support, in principle, of the main objectives stated by the Group of high-level experts: consolidate financial stability in Europe and improve the protection of European consumers/taxpayers in the event of a banking crisis, even if it has reservations about the details of certain regulations.
MEDEF also shares the interest shown in the report for the universal European banking model which has indeed proven its resilience during the recent crisis, and which must absolutely be safeguarded so as to ensure continued and sustainable financing for the European economy. More so, since bank financing of economic activity in Europe is vital, accounting for 75% of total financing in Europe and even more when it comes to the financing of SMEs/ Intermediate sized Businesses.
In its reply, MEDEF deliberately focuses on the needs and expectations of businesses in terms of the supply of banking services and on the impacts of the recommendations of the High-level Expert Group on this supply, both in terms of the availability of such services and in terms of the conditions of access and costs. The ultimate objective must be to develop a European banking system which is not only robust but also efficient and competitive on an international scale, since it is this on which the competitiveness of businesses as well as that of EU Member States depends. From this point of view, businesses have expressed strong reservations about the criteria applied by the High-level Expert Group to separate deposit-taking activities from market-related activities and their impacts on the financing of businesses. In any case, businesses would only be able to sustain the structural reforms of the European banking system if such reforms do not penalise the financing of the real economy.
BUSINESSES NEED MARKET-RELATED ACTIVITIES
MEDEF draws attention to the importance, particularly at the moment, of sustaining an objective view of market-related activities in order to bring clarity to the debate. A significant part of banks’ market-related activities caters to the needs of businesses and economic operators, whether it is short-term investment or share and bond issues, market-making, interest-rate or exchange-rate hedging operations, export finance, mergers/acquisitions, etc. Businesses therefore regret that the approach adopted by the High-level Expert Group is not based on the economic benefits of the various market-related activities but is solely a risk-based approach, where risk assessment is based on the volume of activities concerned.
They also note that Corporate and Investment Banking subsidiaries of European universal banks are currently the only European financial operators capable of providing these different services and that the transition process to more disintermediated financing will only be successful if it does not weaken them as a result of the structural reforms but maintains their competitiveness.
MEDEF endorses the significant role of supervision and, more than purely prudential, regulation, of market-related activities deemed “risky and/or not very useful” to the real economy. It is therefore wholly in favour of the supervision and monitoring of proprietary trading activities, in particular of “directional positions”.
BUSINESSES OVERWHELMINGLY APPRECIATE HAVING A SINGLE CONTACT AND COMPREHENSIVE SERVICE WITHIN THEIR BANK(S)
Businesses are very careful about maintaining relations with powerful banking networks, capable of offering them the range of financial services that they need (1-month and 3-month deposits, bond funds, issue of commercial papers, back-up line, exchange-rate products, interest-rate products, purchase of commodities with guarantees and price fixing, credit guarantees, short-term investments, financial structuring which are sometimes complex, public-private partnerships) at competitive costs, in particular for small-sized transactions.
Businesses appreciate the fact that they can rely on their bank(s) to grow (financing of their investment programmes) and diversify internationally (support abroad) without having to deal with different contacts, which would mean increased complexity and costs to them. Higher costs would also make it impossible to negotiate for the required services globally and would result in an increase in the refinancing cost of the money market bank which, according to the recommendations of the Liikanen report, will only marginally benefit from the Group’s support.
Moreover, it is important to underline that businesses consider financing activities and market-related activities as a continuum. It is therefore very difficult to isolate one from the other. In this respect, the example of market-making is particularly enlightening. This activity is vital for businesses which need to have recourse to the market and to cover the financial risks inherent to their activities. Should there be a reappraisal of the European banking model, European banks will no longer be able to guarantee, to the benefit of their clients, issues on the primary market if they cannot guarantee liquidity on the secondary market. These businesses need “solid” end-to-end support (primary activities and market trading) in order to place their securities.
There will also be detrimental consequences for European SMEs if deposit-taking banks are prohibited from capital investment activities. These activities are already highly penalised by the new prudential norms laid down within the framework of Basel 3 and Solvency 2 for insurance companies.
BUSINESSES MUST CONTINUE TO HAVE A WIDE RANGE OF CHOICES IN THE EUROPEAN BANKING WORLD
MEDEF would like to stress that the diversity of banking supply is a key factor to the competitiveness of businesses. It allows them to put financiers in competition with one another and gives them scope to negotiate the cost of access to financial resources.
French and European businesses insist particularly on this point. They are worried about the impact of the reforms proposed by the High-level Expert Group on the future of the banking landscape in Europe, and have expressed a real need to have a diversity of European players by their side.
In this case, the reforms proposed by the High-level Expert Group are likely, from MEDEF’s point of view, to lead to the phasing out of most European Corporate and Investment Banks, or at the least of their market-related activities. Under any circumstances, Corporate and Investment Banks, deprived of the infrastructure of their diversified parent company, will find it hard to survive and in particular to be significant players. Only 2 or 3 operators are expected to survive (if the reforms are implemented). Moreover, it is to be noted that there are no “pure” Corporate and Investment Banks in Europe and there is therefore a risk that the proposed reforms result in a massive exodus of market-related activities to foreign operators and mainly to US operators (large universal banks or Corporate and Investment Banks).
As a result, these operators would maintain an undisputed lead. And the ensuing concentration of the banking market will be highly detrimental to European businesses (less competition and obviously a contraction in supply) and will lead to an increase in systemic risk within the international banking system.
Moreover, it is beyond doubt that the existence of powerful and highly globalised French and European banks enhances the competitiveness of the country and of Europe. It is clear that the disposal of assets, that French banks in particular have been compelled to undertake over the recent period, mainly in market-related activities, has been beneficial to US and Asian banks. This can represent a major obstacle to international competition.
This will be particularly true when French and European businesses are faced with competing projects: foreign banks will be under pressure to support projects from businesses in their own countries, and French and or European businesses will be under pressure to accept more transfer of technology, at the risk of not obtaining financing. From this perspective, the real issue is one of safeguarding national and regional interests.
Moreover, it should be noted that market-related activities, which are significant today, will in the future, play an increasingly important role in the financing of businesses, due to the Basel 3 regulations. Hence, Europe has every reason to ensure that it doesn’t become “worse-off” in this respect.
EUROPEAN BUSINESSES WOULD NOT BEAR AN INCREASE IN THEIR COST OF ACCESS TO FINANCIAL RESOURCES, PARTICULARLY IN THE CURRENT ECONOMIC SITUATION
MEDEF calls attention to the fact that several initiatives have been taken at the international and the European levels to ensure the stability, security and transparency of markets, consolidate bank solvency and reduce systemic risks. These initiatives have generally been understood and accepted by businesses: capital ratios have increased four-fold with Basel III and CRD IV, a bill on European banking supervision has just been presented, regulations on systemic institutions are being drafted, so is a bill on guarantee funds and another one of the resolution of banking failures, while regulations on the derivatives market have been significantly reinforced.
These regulations have not all been drafted in detail and/or implemented yet. It is therefore too early to say that they will not be sufficient.
However, MEDEF notes that they represent an addition to constraints which are already affecting the activities and balance sheet structure of European banks as well as some types of financing for businesses and for the economy. Going too far would involve a real risk to growth financing. Hence, MEDEF again draws the Commission’s attention to the cumulative impacts of all these initiatives.
Businesses consider that it would be necessary, before any new major regulation is introduced, to analyse the impact of the measures already taken, both on the stability and the security of markets and on banks’ capacity to finance the economy in Europe.
All in all, collective interest and economic recovery in Europe call for strong political actions which protect the volumes of credit disbursed and maintain the cost of financing at competitive levels. This is particularly important in the current economic situation.
Direction des affaires économiques, financières et TPE/PME/ETI
November 2012