EC Green Paper (GP) on Long-Term Financing (LTI) EESC ECO Section Public Hearing, 30 May, 2013 Andreas Botsch, ETUI
New interest in LTI EC publication of GP on 25 March, 2013: Europe has suffered from an insufficient amount of capital being invested with a long-term perspective ( equity gap ) Parallel work on LTI in G20: 2 OECD Institutional Investors and LTI Project Feb 2012 - "High Level Principles of Long-Term Investment Financing by Institutional Investors" Financial Stability Board Report to G20 Finance Ministers on Financial Regulatory Factors Affecting The Availability Of LTI Finance (8 Feb 2013) Group of Thirty: Long-Term Finance and Economic Growth titleofthepresentation
Conceptual framework of LTI: dichotomies Productive capital Investing Long-termism Volume of net assets Real capitalism Financial capital Betting Short-termism (HFT, churning) Lack of demand Financial capitalism/ financialisation 3 titleofthepresentation
Definition of LTI Long-term investment is the formation of long-lived capital, covering tangible assets energy transport and communication infrastructures intangible assets education research and development industrial and service facilities housing climate change and ecoinnovation technologies that boost innovation and competitiveness 4 titleofthepresentation
LTI problematique: financial crisis has affected the ability of the financial sector in Europe to channel savings to long-term investment needs current weak macroeconomic situation has created a climate of uncertainty and risk aversion in crisis countries and for SMEs (credit crunch) banks' willingness to lend at long maturities is limited, as they need to deleverage has had a negative impact on the confidence and risk appetite of both borrowers and institutional investors 5 titleofthepresentation
Problematique (2): Eurozone in balance sheet recession
Comments on specific questions Q1+Q2: analysis of nature of long-term investment Q3+Q26-29: role of banks / SME financing Q20: fair-value (mark-to-market) accounting Q21-23: corporate governance Q24-25: (nonfinancial) information + reporting
Q1+2: Analysis and definition of long-term investment Long-term better than short-term investing but not necessarily the same thing as socially responsible investment Skills development / training Public infrastructure Green investment Job creation (e.g. retrofitting of buildings) Return for society, less so for private investors? Equity finance often short-term investment Definition: higher ST-returns preferred over lower ST but higher LT returns
Q3+Q26-29: role of banks / SME financing Bank finance remains central (SMEs, communities) Failure of corporate governance in many listed banks - Deutsche Bank: 25% ROE target Role of cooperative and public banks UK BoE funding for lending programme HU National Bank: R free loans for lending to SMEs
Q20: Fair-value (mark-to-market) accounting Pro-cyclical effect Played a role in financial crisis Reregulate accounting standards: fair value accounting and quarterly reporting -> favour short-termism + derivative instruments (tailor made for board rooms) Need to allow more conservative approaches Value at maturity Replacement cost
Q21-23: Corporate governance Overlap with Action Plan on corporate governance and company law Clarify fiduciary duty Not just maximizing return Allow social + environmental criteria Include riskiness of investments Clarify acting in concert e.g. allow cooperation of pension funds against bad firms LT incentives (e.g. financial transactions tax)
Q24-25: Information + reporting Mandatory social + environmental reporting by companies Institutional investors: Disclosure of policies for socially responsible investment Disclosure of voting records on company shares Credit ratings: lack of long-term benchmarks European rating agency?
Taxation Corporate and Income Taxes: favour debt over equity (tax deductible R) -> higher leverage for companies (PE model of tax arbitrage) non-financial reporting: sustainability indicators 13 Andreas Botsch etui (2013) titleofthepresentation
Financial regulation determining the financing of LTI 1. The capacity of financial institutions to channel longterm finance depends on EU financial regulation: deleveraging of banks reducing the size of banks balance sheets structure of the European banking sector commercial vs. investment banking role of national and multilateral development banks, e.g. EIB, CdD, KfW long-term investors club : project bonds institutional investors holding 13.800bn of assets (insurance (Solvency II) and occupational retirement provisions (IORPs II) combined effects of regulatory reforms 14 titleofthepresentation
EU bank assets in % GDP Total assets of financial institutions 15
Composition of bank assets: from real banking to trading Note: Customer loans are loans to non-monetary financial institutions 16
Composition of bank liabilities: Increased leverage illustrated by shifts in funding structures Note: Customer deposits are deposits of non-monetary financial institutions 17
Market financing: corporate bonds & securitisation Market financing may be part of the solution to fill the long-term funding gap market financing calls for a parallel regulation of shadow banking, as unconstrained risk located outside of regulated institutions has created systemic problems securitisation should be without leverage, maturity transformation, principal agent problems, overreliance on ratings or loss of flexibility for the borrowers qualitative difference between bank lending and market lending needs to be taken into consideration Shareholder Rights Directive: stimulate long-term holding of shares such as increased dividends or voting rights. Buy-and-hold investments better align with real economy interests than short-term trading titleofthepresentation 18
European pension funds asset allocation (% portfolio) Equity gap: European pension funds have been shifting out of equity, toward bonds and alternative assets 19 titleofthepresentation
What the GP does not address Public equity : channelling the > 27.2trillion EU net assets under management to a publicly managed LTI innovation fund to modernise productive capacity in Europe ( Marshall Plan ) LTI intermediation to serve society at large: full employment & decent work Company as a social entity Company culture based on trust and long-term relationships (internal as much as external) Stakeholders from within: role of (non-financial) worker participation for sustainable enterprises 20 titleofthepresentation
Thank you for your attention! 21 titleofthepresentation