Internal Market and Services DG (DG MARKT), Unit 02. European Commission Rue de Spa 2 (3/020) 1049 Brussels Belgium

Transcription

1 Internal Market and Services DG (DG MARKT), Unit 02 European Commission Rue de Spa 2 (3/020) 1049 Brussels Belgium By markt-consultation-long-term-financing@ec.europa.eu Dear Sir / Madam The British Bankers Association (BBA) welcomes the opportunity to input into the European Commissions Green Paper on long-term financing of the European Economy and we set out our response below. The BBA are the UK s leading association for the banking and financial services sector, representing the interests of more than 240 member organisations with a worldwide presence in 180 countries. We hope that you will find our response, laid out below, useful. For further information on this submission please contact Irene Graham, Managing Director, Business Finance and Strategy, British Bankers Association: irene.graham@bba.org.uk British Bankers Association June 2013 British Bankers' Association The Voice of Banking and Financial Services Pinners Hall Old Broad Street London, EC2N 1EX 1

2 The Commission Green Paper on the Long-term Financing of the European Economy: the British Bankers Association response Overarching comments and recommendations: The British Bankers Association (BBA) welcomes the opportunity to respond to the European Commission s Green Paper on the Long-term Financing of the European Economy. We are the UK s leading association for the banking and financial services sector, representing the interests of more than 240 member organisations with a worldwide presence in 180 countries. Our member banks make up the world's largest international banking cluster, operating 150 million accounts for UK customers and contributing over 50 billion annually to UK economic growth. We represent our members to policymakers, regulators, the media and all key stakeholders across the UK, Europe and beyond, working together to promote a legislative and regulatory system that works for customers and promotes economic growth. We represent over 200 banking members, which are headquartered in 50 countries and have operations in 180 countries worldwide. These member banks collectively provide a full range of banking and financial services to customers, including to nonbank finance providers. The Green Paper comes at a critical time; confidence in the economy remains low and uncertainty for businesses continues to impact upon investment plans. Equally, the banking industry is evolving in line with new regulatory frameworks at both a domestic and international level and this can create uncertainty for long-term investment both by businesses and investors which may have unintended consequences The BBA welcome the Commission s decision to examine long-term investment as a driver of growth and are pleased to respond in writing to this paper. In particular we welcome the fact the paper provides the backdrop to further consider the balance between regulatory reform designed to improve stability, which banks support, alongside the cumulative impact to the real economy and potential unintended consequences The banking industry endorses the objective of the Paper to further develop the range of long-term finance options to businesses aside from traditional lending products. We agree that banks will continue to play a key role in financing the real economy as well as be a key originating channel for long-term finance. As a business grows and develops it needs to have the appropriate range and mix of finance to support it. An efficient financing market for businesses requires banks, non-bank debt providers, equity providers and capital markets to work together. Banks already play their part in providing a wide range of products to the real economy outside of the traditional lending arena, including specialist asset finance, invoice finance, supplier finance, structured finance and equity financing solutions. Banks also operate specialist finance functions/subsidiaries and relationship teams that support alternative forms of finance, enabling borrowers to be more flexible in their decision making. 2

3 Banks also play their part in developing new avenues of long-term finance to support growth businesses: for example in 2011, as part of the UK Business Finance Taskforce 1 with the objective of broadening the finance options available to businesses, the major UK banks established the Business Growth Fund, an independent 2.5bn equity fund focused at providing long-term, non- controlling, growth capital in the form of equity investment to businesses with turnover from 5m - 100m. This responds to the clear demand from growing businesses for long-term capital, through a minority shareholding When evaluating the options of long-term finance we must also recognise that businesses and SMEs are a very broad church; from microbusinesses through to large sized medium companies and midcaps. We must ensure long-term finance solutions suit the life stage and aspirations for the particular business, its sector and the maturity term such businesses need. As part of the review we must acknowledge that overall more work must be done to encourage businesses to think about long-term planning and in encouraging / incentivising a business to consider options including recognition of the benefits of equity investment. Independent research assessing the mix of finance tools that businesses use shows that whilst wider sources of finance are being utilised work is still needed to ensure businesses understand the range of specialist finance options available to them. The balance between debt versus equity finance and risk profile is one that needs to further evolve. Further work across Europe is needed to improve investment readiness and help businesses to recognise the benefits of long-term investment and of instruments other than traditional debt. As an exemplar, the UK banking industry has put in place several initiatives aimed at increasing guidance to SMEs as businesses seek the right type and mix of finance for their needs. This includes a national finance mentoring programme with a new online portal connecting businesses to mentoring organisations 2 ; new trade schemes; tools to help when reviewing finance options (businessfinanceforyou.co.uk) and a regional events programme across the country working with business groups to provide guidance on the range of finance options, including alternative sources of finances. How such programmes and tools can be replicated across Europe should be considered by the Commission and whether it itself hosts a pan European central aggregator of such information, not only for EU programmes but those run by the private sector in national territories should be explored. When evaluating finance we must also recognise that short-term finance and longterm finance should be seen as a continuum and we would caution that short-term financing needs should not be neglected over long-term financing needs. A full response to each of the questions posed by the Green Paper follows. In particular the BBA would recommend: 1 The UK s six largest banks (Barclays, HSBC, Lloyds, RBS, Santander and Standard Chartered) set up the Business Finance Taskforce in October 2010, and committed to 17 recommendations intended improve banks relationships with business, ensure better access to finance and promote understanding of the needs of business customers. Further information available on

4 1. the continuation and development of EIB and EIF facilities and support to the project bond programme; 2. the importance of ensuring that Solvency II and IORP proposals do not adversely impact the supply of long-term investment finance by Insurers and Pension Funds; 3. the importance of an active securitisation market that can be developed further by giving recognition to kite mark initiatives such as the Prime Collateralised Securities (PCS), by fully incorporating such securitisations into the regulatory frameworks and European and National central bank activities and creating a single harmonised framework for covered bonds to further underline investor confidence in this market; 4. the need for effective long-term project, infrastructure and export finance support, including the need for the European Central Bank and other EU central banks to consider how to allow for Export Credit Agency supported export credit to be eligible under their refinancing windows; 5. incentives to kick start the European private placement market and work nationally to review possible corporate bond markets; 6. a review of saving instruments incentivised to support long-term investment in business 7. the need for continuing encouragement of angel finance through tax incentives and co-investment funds to support long-term finance of startup and early stage companies 8. that the Commission continue to encourage and build confidence in businesses to seek out investment and growth opportunities. In this regard the Commission should consider whether it itself acts as a pan European central aggregator of information on the range of finance schemes, not only for EU programmes but those run by the private sector in national territories thereby encouraging businesses to seek the right mix of finance resources. 9. the review of what potential tax incentives are deployed to encourage businesses in long-term planning and take up of long-term equity options. 10. the active promotion by the Commission to the SME community, that banks are open for business, to help build confidence and demand for finance. Under-pinning long-term investment is the criticality of a stable and consistent framework for finance providers to operate within. Uncertainty has a direct impact on the wider economy and to this end we re-emphasise the importance of the single market and the potentially damaging impact of a Financial Transaction Tax on Europe s ability to recover from the current economic problems it faces. The EU economy cannot be viewed apart from the global backdrop. Policies formulated and implemented in the EU must align with those made globally to encourage long-term investment both at a domestic and international level and allow businesses to develop oversees by remaining competitive with their international counterparts. The BBA also believes that every proposed financial regulation should be reviewed with a growth lens applied. In this respect regulatory change may have the primary 4

5 objective of stability but a secondary objective should always be focussed on growth and the impact on such, in essence growth proofed. The BBA looks forward to supporting the Commission in taking the ideas generated by the Green paper forward. We fully intend to continue to support the range of bank and alternative solutions to support the long-term financing of the economy over and above traditional forms of finance. 5

6 Green Paper Questions: 1) Do you agree with the analysis out above regarding the supply and characteristics of long-term financing? The BBA welcome the Commission s decision to examine long-term investment as a driver of growth and are encouraged that the Commission are examining in detail how growth can be supported in a stable and sustainable fashion and we reiterate that key to supporting long-term investment is a stable and consistent framework for finance providers to operate within. The BBA are, broadly speaking in agreement with the analysis laid out in the Green Paper, but would emphasise that short-term finance and long-term finance are on a continuum and we must not neglect short-term financing needs, often underpinning the ability to obtain long-term finance. Additionally, we must recognise that there are a multiplicity of financing requirements and that in meeting these no one financing mechanism will be appropriate. The instruments used to address large financing requirements are likely to differ from those used to address smaller requirements; likewise the ease of access to capital markets; management capability and investment readiness will all play a role in determining the suitable mix of financing. The banking industry is working hard to ensure that a range of financing instruments is available, either through direct lending, or by supporting alternative finance providers to meet the breadth of financing requirements. We believe that banks will continue to act as the main source of finance for SMEs seeking working capital facilities and / or investment to support stable growth, and approval rates for these types of facilities have remained at around 80%. Banks have equally sought to support and develop solutions for SMEs long-term growth capital needs. In the UK this is evidenced through the establishment of the bank backed Business Growth Fund (BGF). The success of this model has been evident; 27 investments have been made and the BGF is aiming to support 30 new companies a year. The BGF model is one that could be considered as best practice in terms of incentivising asset managers to support long-term investment. Other models are equally proving successful: The Breakthrough Growth Capital fund offers investment in the form of a mezzanine loan that doesn t require any dilution of the owner s shareholding and, unlike other forms of funding, does not have an equity component. The money is advanced in the form of debt, repayable at an agreed date while the bank receives its return through interest repayments. The Breakthrough programme 3 is another innovative model that could be further developed across Europe to further support long-term investment. At the same time, banks are able to support mid-caps and corporates in accessing debt finance through capital markets, and in seeking equity finance through listing. It is important then that we recognise that different customers will have different financing needs. 3 Designed and offered by Santander UK plc 6

7 2) Do you have a view on the most appropriate definition of long-term financing? The BBA recognise that there is much debate over the definition of long-term finance ; the Green Paper purports that one definition arising from the on-going international work under the auspices of the G20 on long-term investment defines long-term finance as, focusing on maturities of financing in excess of five years, including sources of financing that have no specific maturity (e.g. equities). The BBA broadly agrees with this definition relative to SMEs and mid-caps although it will also vary across businesses and types of sector. In addition caution must be exercised in making the link between long-term growth prospects of an economy and suggesting it is just about long-term finance. In our view, long-term finance is not synonymous with good investment. For a business to invest it is critical that they have the confidence to do so and by operating on a stable base, with the appropriate short-term finance in place, businesses may consider increasing longer term finance to support their growth ambitions. In short the two cannot be viewed in isolation. Such a binary definition of long-term finance potentially overlooks the crucial role that short-term finance plays in the growth of the economy and the interdependency between the two. 3) Given the evolving nature of the banking sector, going forward, what role do you see for banks in the channelling of financing to long-term investments? The Commission are rightly focusing on improving stability and at the same time seeking to encourage growth. Assuming the current trajectory for regulatory change continues, the BBA believes that the role that banks play in supporting financing will evolve. It is important to recognise that different customers must be approached in line with their differing needs. The manner in which SMEs are approached will be distinct from other larger organisations as needs and experience will require a different series of skills from financial providers as well as a potentially different set of products / accessibility of products. Banks will remain the primary source of debt finance at a range of maturities to SMEs. Well established distribution networks and ease of access are important factors and are underpinned by the familiarity amongst the SME community as regards many of the services and products available to them from banks. Focussed measures by many banks to examine and evolve their offering to the SME community are also having an impact: development of asset finance; invoice discounting and supply chain finance solutions are allowing businesses to select the right mix of products, whilst support programmes targeting SMEs further underline the importance of the relationship between banks and SMEs. Banks also have a key role to play in connecting the financial landscape by working with the range of alternative finance providers. 7

8 This picture is in contrast to large corporates and multi-nationals that do not rely on direct bank finance but rather are able to access debt and equity capital markets to raise long-term finance. Banks will continue to support larger corporates in accessing capital markets and executing these transactions to facilitate their investment plans but balance sheet exposure to corporates is likely to be with respect to the supply of short-term liquidity and working capital facilities and / or revolving facilities. Instances will of course occur where banks are called upon for direct financing, for example to finance activity in mergers and acquisitions, but again the capital markets will frequently be called upon to re-finance such activity in due course and it will become increasingly important that these operate efficiently across Europe. The BBA believe the banking industry will continue to play a key role in supporting long-term infrastructure investment through the origination and structuring of investments and co funding long-term projects. Requirements under new regulatory frameworks such as Basel III and CRD IV do however lead to pinch points on lending terms beyond five years which will drive greater use of shorter maturity facilities, with a strong incentive to refinance after five years and the need for banks to further innovate on structures. It also means however, that there is a more critical need to unlock capital markets for insurers and pension funds to work alongside banks to meet long-term financing needs of the real economy. The key role of banks is therefore in: 1. Providing the foundation for long-term investment To support stable growth, businesses must have access to the right finance at the right time. Traditional loan and overdraft facilities still play a vital role in supporting businesses but often a business s needs may be best served through invoice financing; asset backed financing; supply chain finance or export finance, all of which are offered by the Banks. In achieving the right mix of these products a business will have the ability to better manage their working capital and liquidity requirements allowing the business to focus on their investment plans for the longer term. 2. Channelling of finance to long-term investments The banking sector is currently having to adapt in line with evolving regulatory frameworks. Basel III makes financing longer term investments more challenging for banks. However banks will continue to support financing needs through origination and structuring of investments and by often providing a core element of the financing through shorter maturity facilities, with a strong incentive to refinance after five years, as well as connection to equity investors such as Angel finance for start-ups / early stage businesses and vehicles such at the BGF for patient growth capital. The financing of infrastructure projects that typically require funding for 25 years and beyond, has become increasingly difficult for the banking sector under Basel III. Banks have had to evolve in line with the regulatory requirements and therefore have looked at new models for financing, for example by separately financing, at shorter term maturities, the construction phase and operational phase of infrastructure projects and actively supporting the origination, structuring and monitoring of the risk associated with the construction phase, with a view to facilitating institutional investors involvement. In doing so, over shorter time horizons (i.e. below five seven years) banks are able to play a key role in supporting infrastructure investment, however, were EU schemes to step in to take the refinancing risk in concession based projects in particular as the project enters the operational phase, 8

9 greater capacity to support infrastructure projects may be built as this would facilitate the transition between construction financing bank debt and operational financing through the capital markets. Finally, the banks also continue to facilitate the raising of long-term finance, in particular providing an access point to the capital markets in originating both debt and equity finance through corporate bond issuance and listing of equities on stock exchanges albeit we recognise the corporate bond and stock market listings are more suitable for larger businesses. 4) How could the role of national and multilateral development banks best support the financing of long-term investment? Is there scope for greater coordination between these banks in the pursuit of EU policy goals? How could financial instruments under the EU budget better support the financing of long-term investment in sustainable growth? We recognise that public sources of funding can play an important role in supporting long-term investment but in order to do so effectively, interventions should be targeted at specific gaps in the market and should be structured to in such a way as to leverage the knowledge and expertise; distribution channels and funding capacity of existing finance providers. As a consequence, whilst pan-european processes are important there will of course need to be domestic interventions aligned to local needs. At present EIB / EIF schemes operate well and EIB public bonds are a good example of how private sector funding of longer term finance carrying greater risk through partnership with the public sector. There may however be opportunities to develop these further either expanding the EIB/ EIF guarantee programme sizes or through development of the project bond facility to include export finance. Key to the effectiveness of both national and multilateral interventions are simplicity; ease of access to the scheme and awareness. Thus far interventions delivered at a European level have been effective, but with the increasing complexity of programmes (for example with the linkages between the COSME and Horizon 2020 initiatives scheduled to become operational in 2014) there is a danger that schemes will lose their impact if not well understood and ultimately fail to support the growth and confidence amongst recipients. One potential solution would be to create a register of schemes operating nationally and across Europe to provide greater clarity. We have seen at a domestic level that where schemes are well publicised confidence can be positively impacted. For example 20 per cent of SMEs are more likely to seek finance as a result of the Funding for Lending Scheme 4. It is therefore an imperative for the long-term financing of the European economy that positive messages drive confidence amongst the business community to invest and therefore boost demand for finance. Further consideration should be given to replicating successful schemes that promote confidence. For example KfW in Germany is an excellent model of public 4 See Q report. 9

10 and private collaboration but we need to ensure that such a model can be replicated across Europe, at a domestic level, without being hampered by state-aid rules not in place when KfW was created. Multilateral interventions should also be focused on where the greatest need is e.g. sector support or on those businesses where raising finance has challenges either through lack of security; lack of track record due to starting out or for those businesses on a high growth trajectory but with limited cash flow. Monitoring of domestic and European schemes by creating a register of these schemes may be useful in better communicating the schemes to stakeholders and creating a more cohesive partnership with the private sector. 5) Are there other public policy tools and frameworks that can support the financing of long-term investment? a) Financing of international trade Growing exporting is viewed as a critical part of the growth strategy across Europe. The BBA and its members have been closely following the evolution of the Basel III accord and EU Capital Requirements Directive IV and we welcome the manner in which the EU has deployed new regulatory frameworks mindful of the need for trade finance transactions in assisting the funding of capital expenditure in global sectors such as energy, telecommunications and transport. However we should continue to stress the need for European Central Bank and other EU central banks to consider how to allow for Export Credit Agency supported export credit to be eligible under their refinancing windows. Such a measure would, under the CRD IV liquidity coverage ration improve the liquidity of export credits affording greater flexibility in managing bank balance sheets. b) Finance for industry For Europe the prompt payment directive and Supply Chain Finance should be progressed as these mechanisms have an important role to play in the release of critical working capital funds, currently locked within receivables, allowing businesses to focus their attention on the financing of long-term investment and growth. We would encourage that the EU prompt payment directive be leveraged with implementation across national governments and multinational businesses. 6) To what extent and how can institutional investors play a greater role in the changing landscape of long-term financing? We agree institutional investors such as pension funds and insurance companies are identified within the Green Paper a valuable source of long-term financing given the longer time horizons of their business models. Unlocking this financing potential could prove vital. It is critical that the regulatory framework under Solvency II and IORP is aligned to enabling pension funds and 10

11 insurance companies to deploy their assets into long-term investment for the real economy. We must however recognise that institutional investors will have varying demands with regards to the instruments they choose to invest in debt or equity preference for liquidity; appetite for risk, in particular construction risk etc. Direct lending to businesses is likely to be challenging for institutional investors that typically are not equipped with the resources or expertise to perform the due diligence process that lending to businesses / originating infrastructure transactions requires, irrespective of a strong demand for investment, particularly into infrastructure. That is why having the right SME securitisation and covered bond vehicles in place, originated by banks, will be vital in unlocking long-term patient capital from institutional investors. In order to achieve the fullest benefits of such instruments in some instances targeted government guarantees may be necessary. 7) How can prudential objectives and the desire to support long-term financing best be balanced in the design and implementation of the respective prudential rules for insurers, reinsurers and pension funds, such as IORPs? We understand, of course, that the EU authorities are committed to stability and to the global implementation of financial services regulations. We also concur with many of the rule changes that have taken place, particularly those surrounding capital but believe that the regulatory environment must enable investors to fulfil their potential in supporting economic growth. The relative weighting of different asset classes will play a crucial role in determining how investors allocate their resources and we touch elsewhere on the different capital treatment for covered bonds versus securitisations under Solvency II. Commissioner Barnier has indicated his intention to produce a proposal for a Directive to improve the governance and transparency of occupational pension funds in the autumn of The BBA welcome the Commission s decision not to include Solvency II funding requirements in the review of the pension s directive (IORP) but rather to focus on governance and transparency, areas that we outline further in Q21 and Q22. 8) What are the barriers to creating pooled investment vehicles? Could platforms be developed at the EU level? A major impediment to creating pooled investment vehicles is the lack of consistent historic data on the performance of the SME / business sector over time. Securitisation plays a crucial role for banks in facilitating capacity throughput by allowing the packaging of assets from their balance sheet to create headroom for more activity. Additionally securitisation may be an effective tool to provide financing for specific financial obligations, as the term of repayment typically matches cash flow from underlying assets. 11

12 Unlike the United States low confidence since the crisis in EU securitisation markets has prevented these markets operating efficiently in Europe despite the robust performance of the majority of European Securitisations. As the BBA outlined in its 2010 report Restoring confidence: how wholesale markets will help the Prime Collateralised Securities (PCS) initiative which has now developed and launched can play a key role in accelerating the recovery in asset backed securities markets and unlock long-term investment opportunity for the real economy. However, for the PCS to fulfil this role and be fully effective there must be an elevation in the official treatment of the kite-marked securities as investments reflecting the Authorities view of their soundness and relative liquidity standing; this will facilitate long-term investment in such pooled vehicles from pension funds and insurers and in turn enable banks to free up long-term investment to businesses The BBA equally concurs with the view of the EBF that as a matter of principle the regulatory treatment of securitisation instruments should be equivalent to that of the underlying pool of assets. The Commission should also give further consideration to successful international models for pooled investments. For example the Austrian market has developed an innovative solution, whereby intermediating vehicles and structures have allowed investors diversify their exposure to mid-sized corporates and facilitated access to bond markets for a broader range of companies by accommodating smaller issuances. 9) What other options and instruments could be considered to enhance the capacity of banks and institutional investors to channel long-term finance? One of the recurring themes recognised by the private and the public sector is the gap in availability of long-term equity growth capital for firms requiring between 2m and 10m. Conventional private equity and venture capital funds are very limited in this range, given the investment risks and the relative costs of making and managing small investments. Above this range deal sizes are generally served by existing commercial funds and below this range there are existing Government support schemes. An example of the way this may be addressed is seen in the UK where five of the major banks came together in 2010 to launch the Business Growth Fund the needs of growing companies, typically with a turnover of between 10m to 100m, with equity funding requirements generally in the range of 2m to 10m. The investment provided would be in the form of equity capital, to be complemented by loans and trade finance offered by banks in order to deliver a complete capital solution to growing companies. The banks are equally able to benefit from the capital treatment under Article 87(2) within CRD IV which covers risk-weighting for Collective Investment Undertakings, once the portfolio has reached an appropriate scale and diversity. This initiative could be replicated in other markets in Europe and is a matter to be explored by each member state but the Commission could assist in growing funds such as this by promoting the success of ventures such as the Business Growth Fund. 12

13 Another area that should be further explored is in Private Placement. Whilst businesses have access to the Private Placement market, with a number of midsized businesses having successfully raised funds in this market during in recent years, it remains the case that most of the Private Placement investors are USbased, with the issues usually denominated in dollars rather than sterling. This has impacts in relation to cost and currency risk. Encouraging a larger and more active investor base across Europe would potentially introduce greater liquidity into this market and, in doing so, offer further support to European growth. We believe it is likely that concerns reflect a combination of lack of lending infrastructure (to undertake single name lending assessment), low faith in take up (to justify up-front investment in teams) and scepticism about fair value compared to alternatives. Efforts to establish a critical mass of activity could kick-start such a market. 10) Are there any cumulative impacts of current and planned prudential reforms on the level and cyclicality of aggregate long-term investment and how significant are they? How could any impact be best addressed? Established by the Financial Stability Board and the Basel Committee on Banking Supervision the Macroeconomic Assessment Group has conducted a number of impact assessments and in particular has considered the estimated impact on growth of a one per cent increase in the capital requirements for the banks. This information has provided much useful insight however it remains unclear from the work undertaken whether certain asset classes or types of investment will be affected to a greater extent. It will be critical in the EU for the ESRB to monitor very closely actions taken by macro-prudential authorities as there must be a balance between stability and growth. Ultimately banks will look to evolve their operating models to ensure that they remain competitive with other sectors in respect of capital investment and deliver the return on equity required to make them attractive. As banks seek to maximise their return on investment they are incentivised to operate models that are less capital intensive; in this respect short term financing may be considered more attractive, reducing funding costs and improving return on investment. Inevitably banks will seek to adjust their operating models to ensure that they remain attractive to investors so we must ensure that banks are equipped with the tools to manage the cumulative impact of new regulatory frameworks. Re-establishing confidence in the securitisation markets to increase liquidity will also increase banks ability to actively manage their balance sheets and ensure that the regulatory frameworks designed to improve stability do not adversely impact banks ability to support the economic recovery. 11) How could capital market financing of long-term investment be improved in Europe? Traditionally capital markets have been good source of long-term financing and it is important that they are developed to meet the growing demand for long-term financing. Diminished confidence has impinged on the ability of capital markets to 13

14 support long-term financing and restoring strong market appetite and increasing the number of issuances will be important in driving growth; as will increasing new sources of investment including Foreign Direct Investment (FDS). Below we outline a number of opportunities to support and improve capital market financing across Europe as outlined below: Infrastructure finance The BBA welcome the Commission s work with the EIB on the Project Bond initiative as a valuable source of financing in this area. Under the current Basel III regulation bank financing in excess of five to seven years has become increasingly difficult for banks to undertake, restricting their ability to support infrastructure projects in need of this type of financing. To this end the Project Bond initiative, aimed at developing a liquid project bond market could play a critical role in supporting investment in this area and in particular, given the long-term, safe nature of the asset could open up the market to the significant investment portfolios held by institutional investors. We believe that further infrastructure investment may also be facilitated were the public sector (for example the EIB) to take the risk associated with refinancing of infrastructure projects in bond markets beyond the construction phase. Lenders are heavily incentivised to ensure the project is robust over the life of the contract as any underlying issues in the project will be picked up at the refinancing point and threaten repayment of the debt. Take out of the debt would be subject to the project meeting pre-agreed targets. In adopting this model the banks could continue to act as originators; perform robust due diligence and with greater certainty over re-financing it is possible that margins may be reduced. As the project moves into the operational phase, the cash-flow profile is well suited to financing through the bond market and would be likely to attract institutional investors, reluctant to take the risk in the construction phase, but with a greater appetite for the long-term cash-flows in the operational phase. Looking specifically at low-carbon infrastructure there is a risk of a gap in long-term financing. Several steps could be taken to bridge this gap, including: a reduction in the Solvency Capital Requirement (SCR) charge for this type of infrastructure under Solvency II; as outlined above, the creation of a secondary bond market for lowcarbon assets (including asset backed and covered bonds) and the development of a low-carbon refinancing guarantee facility by the public sector. The BBA also recommend that the Commission further consider international experience and in particular schemes such as the Build America Bonds (BABs) programme. In operation between April 2009 to December 2010, municipal bonds were given special tax credits and federal subsidies for either the bond issuers or the bondholder. Effectively the scheme incentivised capital projects that build infrastructure by providing a federal subsidy to state and local governments equal to 35 per cent of the taxable borrowing cost. Incentivising infrastructure investment through a similar programme in Europe could serve to stimulate further investor demand for infrastructure projects encouraging the growth and employment associated with such projects. Supporting long-term savings 14

15 As we go on to outline below one route to boost investment through capital markets is to ensure that long-term savings products provide suitable access to capital markets. In the UK the long established Stocks and Shares Individual Savings Account (ISA) facilitates this and the recent move for the product to support investment into the equities of smaller listed businesses is welcome. It is possible the Commission should look at how such models could be replicated, recognising that each individual country will need to make its own decisions on the most appropriate structure. For investments of this nature (i.e. riskier longer term investments) to be attractive for investors the reward must be sufficient to justify the additional risk. One way in which this can be adjusted is through the tax structure (ISAs for example offer a tax free amount of investment on an annual basis). We would therefore recommend that tax breaks should be made more attractive for longer term, higher risk vehicles as this could prove to be the pivotal factor for an investor in making an investment decision. Securitisation As highlighted earlier re-establishing a securitisation market that operates efficiently and with the renewed confidence would play a key role in giving certain flexibility back to the management of bank balance sheets, particularly for the liquidity ratio at over one year. The BBA continues to support the Prime Collateralised Securities initiative and sees this as important in restoring confidence to this market and as highlighted elsewhere recommend that such kite-mark securitisation should be fully incorporated into the regulatory frameworks and European and National central bank activities. Regulation Leveraging the capacity of retail investors in supporting long-term financing could be highly valuable in supporting long-term financing. In order to protect retail investors the EU Prospectus Directive requires that more detailed disclosure is required where transactions target a retail investment base. Given the significant implication this has in terms of associated costs of producing compliant documentation smaller transactions are not encouraged and deals will typically have a minimum threshold of 100,000, acting as a barrier to many potential retail investors. The BBA would welcome an approach where prospectus requirements were simplified for retail documentation, whilst ensuring that the core messages are appropriately delivered, to safeguard investor understanding. Doing so would allow for the funding capacity of retail investors to be more fully exploited; a change that should equally benefit smaller companies that may be able to access capital markets funding more readily. 12) How can capital markets help fill the equity gap in Europe? What should change in the way market-based intermediation operates to ensure that the financing can better flow to long-term investments, better support the financing of long-term investment in economically-, socially- and environmentally-sustainable growth and ensuring adequate protection for investors and consumers? 15

16 The BBA noted in its 2010 report Supporting UK business that SMEs have historically, relied more heavily on bank provided debt finance to support investment for growth. In many instances where debt has been sought, a more suitable instrument would be equity. Indeed the risk profile of conventional debt, with modest margins and low expectations of default necessarily limits the scale of finance which can be provided. Equity investment provides businesses with the patient capital they require; rewarding investors for the risk they take with the potential of growth rather than interest income. Indeed investor engagement, expanded upon in Q21, is often key to ensuring the success of investees, with shareholders incentivised to provide guidance and support during a down turn. Recognising this, the BBA have taken a number of actions to improve the provision of long-term growth capital in the UK for example through, as outlined above, the creation of the Business Growth Fund (BGF) which could be replicated across Europe. The BGF is an Independently operate 2.5bn equity fund focused on providing long-term, growth capital to businesses with turnover from 5m - 100m. The BGF was established to provide a non-controlling, long-term investment into growing businesses in a space where Private Equity and Venture Capital, historically have not operated. In addition to the industry led establishment of the BGF (as outlined in the response to Q3 above), much focus has also gone into the role that capital markets can play in supporting businesses. Developing across Europe a similar framework to the UK AIM market would be a good step; supporting capital investment through long-term savings structures should be encouraged. To ensure development of models such as this are not hindered by uncertainty over the proposed reduction in SME disclosure requirements under MiFID the Commission should seek to finalise proposals. Public sector support for the use of growth capital, such as that offered by equity finance provided by angel investors, and venture capital, will be essential if scale is to be developed. To this end the BBA continue to work to support schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) and the Angel Co-Investment fund and believe these are mechanisms for supporting angel investment opportunities that could be replicated in Europe. There is much discussion as regards the need for mezzanine finance for businesses. Mezzanine finance can mean many different things to many different players and can be structured in many different ways. In most cases some trigger point exists in the structure that will turn the debt to equity or vice-versa. Whilst further work could be done in looking at this type of finance it needs to be cost effective for the business as such finance structures do bring significant due diligence and costs associated with legal advice, professional accountant and corporate finance advice and therefore may at times not be an economic alternative to businesses. Furthermore the dialogue on direct equity finance and its merits needs to be encouraged with businesses and the benefits of such promoted as opposed to creating more potentially complex, potentially less efficient finance vehicles. 16

17 Critical to the success of the above is creating a tax environment that facilitates this investment. In our view, tax suggestions such as the Financial Transactions Tax (FTT) could de-stabilise economic output and hamper growth. At a time when we should be completely focused on economic growth and creating new jobs, the FTT would increase the cost to businesses of raising funds, making it harder for them to expand in the future. In particular, the FTT would make it more difficult for small businesses to access the funding they need as they are more reliant on bank borrowing to finance future growth. We are also concerned that the FTT will damage the competitiveness of European businesses in global markets. This new growth tax will make it harder for businesses to compete against Asian and American firms in markets outside of Europe. It will also deter non-european funds and companies from investing in Europe. This will ultimately lead to a reduction in investment in crucial long-term finance and infrastructure. 13) What are the pros and cons of developing a more harmonised framework for covered bonds? What elements could compose this framework? The BBA view it as essential that regulatory framework allows investors to fulfil their potential with regards to long-term investment. As the green paper notes, covered bond markets have proved relatively resilient during the crisis, yet are fragmented across national lines. The BBA support the idea of creating a single harmonised framework for covered bonds and believe that doing so would further underline investor confidence in this market and result in greater efficiency; investors would be able to direct their attention towards analysis of the underlying issuers credit and collateral within the pool rather than focussing on the differing frameworks. We also note that the capital requirements under Solvency II are considerably higher for securitised products than covered bonds effectively incentivising investment in this market whilst under the CRD IV addendum, covered bonds traded on transparent markets with an on-going turnover may be considered assets of extremely high quality and credit liquidity (therefore category 1 in the Liquidity Coverage Ratio) supports the covered bond. For this reason further actions to support investment in this market are welcome. However, creating a harmonised framework is not without challenges. Across Europe numerous pieces of legislation would be impacted, in particular insolvency and bankruptcy roles. We however share similar views to that of the EBF in respect of the areas that should be included who note that a harmonised framework should include asset eligibility (credit quality, average maturity of loans), asset pool monitoring requirements and procedures regarding the assets in the event of the issuer s bankruptcy. Access to finance by the cover pool manager following issuer default is also important. At the very least, the aim should be to have minimum requirements in some of the key areas on which investors focus. These areas could include: minimum over- collateralisation level; creation of a minimum liquidity buffer; eligible assets including substitution assets; loan-to-value ratios calculation and thresholds; regular valuation of assets using recognized indices; 17

18 external monitoring; Asset-liability management. 14) How could the securitisation market in the EU be revived in order to achieve the right balance between financial stability and the need to improve maturity transformation by the financial system? For the financial system to support the flow of credit to the wider economy it is essential that banks are able to reliably source wholesale funding and securitisation markets are critical to this. As highlighted earlier it is essential that the regulatory environment supports the securitisation market. At present the proposals of the Basel Committee on Banking Supervision on revisions to the Securitisation framework could impact upon the recovery in ABS markets as a result of higher capital requirements especially for senior positions. Furthermore, the capital requirements under the current drafting of Solvency II is also impacting the market; securitisations demand higher capital versus other instruments such as covered bonds incentivising institutional investors to look at products with lower capital demands. Finally, as the dialogue continues on Solvency II, regulatory uncertainty is impacting on investor appetite for securitisations - even if they would in fact want to make such investments based on relative return. We would encourage the Commission to continue reviewing these regulatory processes and adjust appropriately to support long-term financing. 15) What are the merits of the various models for a specific savings account available within the EU level? Could an EU model be designed? Given the difference in markets it is most sensible to create a national savings model although one that could also attract investment cross border. In the UK the long established Stocks and Shares Individual Savings Account (ISA) facilitates this and the recent move for the product to support investment into the equities of smaller listed businesses is welcome. It is possible the Commission should look at how such models could be replicated, recognising that each individual country will need to make its own decisions on the most appropriate structure. 16) What type of CIT reforms could improve investment conditions by removing distortions between debt and equity? At present businesses that choose to use debt instruments to finance their businesses are able to offset interest payments as a deductible expense for the purposes of corporation tax. We believe the Commission should consider a model whereby selecting equity investment as an instrument to fund the business could receive similar tax relief. Incentivising equity investment could play a key role in kick starting a cultural shift away from debt finance and encouraging businesses to recognise the benefits of equity finance. 18