Europe needs its own SEC, says Christine Lagarde

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Europe needs its own version of the US Securities and Exchange Commission and a unified stock exchange to raise enough money to meet the challenges confronting the region, the European Central Bank president has said.

Christine Lagarde said in a speech in Frankfurt on Friday that “creating a European SEC” to replace the patchwork of national markets watchdogs would help to raise the huge sums needed to tackle the triple problems of “deglobalisation, demographics and decarbonisation”.

Speaking at the European Banking Congress, Lagarde called for an end to the system of national financial exchanges, saying “a truly European capital market needs consolidated market infrastructures — and this is where the private sector can show its determination, too”.

Comparing Europe’s vast investment requirements to the issuance of bonds that financed construction of US railways in the late 19th century, Lagarde said the region needed “a generational effort — and massive investment is needed in a short space of time”.

She said the transition from fossil fuels to renewable energy would require an extra €620bn of annual investment until 2030, while the digital transition needed an extra €125bn per year.

European politicians have been trying to create a “capital markets union” for more than a decade, but Lagarde said “we have so far failed to advance”.

The EU’s companies are far more reliant on the region’s commercial banks for lending, with Lagarde pointing out that US bond markets are three times bigger than in Europe and EU venture capital funding is one-fifth of the US. That’s despite the US economy being less than double the size of the EU’s.

While the European Securities and Markets Authority in Paris oversees financial markets in Europe, national watchdogs still wield a lot of power. Lagarde said the ESMA’s powers could be extended by granting it “a broad mandate, including direct supervision”. But she added: “Beyond a strong institution, a single rule book is also key.”

The creation of a truly unified European capital market could lead to the creation of an extra 4,800 start-ups raising an additional €535bn a year, Lagarde said, citing a study by think-tank New Financial. “We often wonder why these unicorns go abroad and don’t stay in Frankfurt or Europe,” she said.

Underlining the funding shortfall at European companies, Lagarde said an ECB survey found almost 40 per cent of small- and medium-sized enterprises said a lack of investor appetite was a “very significant obstacle” to raising funds for green investments.

Europe’s fragmented financial markets — the region’s stock market is half the size of the US while there are three times as many European exchanges as there are in the US — are holding back fundraising for companies, Lagarde said. “This reduces market depth and liquidity and, as a result, makes it more difficult to develop larger capital markets,” she added.

Commercial bank bosses, speaking at the same event, called for Europe to lift restrictions on the securitisation market, in which banks package up loans and sell them to investors, to boost lending.

Manfred Knof, chief executive of German lender Commerzbank, said there was still suspicion of securitisations stemming from the role of collateralised debt obligations in the US subprime mortgage crisis. “The stigma of securitisation has to end.”

He said this was “more necessary than ever” after the German constitutional court shot down a €60bn off-budget fund Berlin was counting on to finance much of its climate and energy transition in the coming years.

“We are leaving considerable potential untapped here,” Christian Sewing, chief executive of Deutsche Bank, wrote in Handelsblatt on Friday, adding that Europe’s securitisation rules were “far too complicated, the processes take too long and are too expensive”.

Calling for a combination of Europe’s various stock exchange operators, Lagarde said: “The creation of a European consolidated tape can encourage a shift towards larger, cross-border integrated market infrastructure and exchange groups.”

Heavily indebted governments will struggle to provide sufficient financing, Lagarde said, adding that the EU’s €800bn recovery fund launched in response to the pandemic is due to expire in 2025.

“Just like in the United States in the 19th century, it is clear that we cannot rely on our existing framework to finance this investment.”