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CONFEDERATION OF FINNISH INDUSTRIES EK
Competitiveness and Growth
Tommi Toivola
1 (5)
1 June 2012
European Commission
Directorate General for Internal Market and Services
Unit H1 – Banks and Financial conglomerates
Consultation by the High-level Expert Group on Reforming the structure of the EU banking sector
Identification of the respondent
Confederation of the Finnish Industries EK (hereinafter “EK”) is a stakeholder
association representing all sectors of business and all sizes of companies in
Finland:
 27 member federations
 About 16,000 member companies, of which 96 % SMEs
 Over 70 % of Finland's GDP
 Over 95 % of Finland's exports
 About 950,000 employees
EK is a member of BUSINESSEUROPE representing 41 central industrial and
employers’ federations from 35 countries, working together to achieve growth
and competitiveness in Europe.
Identification number of Confederation of the Finnish Industries EK in the
Commission register of interest representatives is 1274604847-34.
If the responses to the consultation are published, the respondent agrees to
publication of this response together with the other responses.
Contact person of the respondent: Tommi Toivola, Senior Adviser, Financing,
email: [email protected], P O Box 30, FIN-00131 Helsinki, Finland, tel + 358
9 4202 3292.
Response to the consultation
EK wishes to thank for the opportunity to provide its views to the High-level Expert Group considering whether there is a need for structural reforms of the EU
banking sector. EK presents its views below following the questions targeted
for companies in the questionnaire.
CONFEDERATION OF FINNISH INDUSTRIES EK
Competitiveness and Growth
Tommi Toivola
2 (5)
1 June 2012
What are the main banking services and products that you seek from your bank?
The banking services and products that companies seek from their bank vary to
some extent between companies and based on their scope, industry and scale
of operation. A typical company exporting capital goods may for example seek
the following main services: loans, trade guarantees, financial guarantees, fx
trading, money market trading, cash management services and funding for
transactions backed by export credit agencies.
What impact do the current and ongoing financial regulatory reforms have on the availability
and cost of financing and other customer services of banks?
There are varying estimates on the impact of individual regulatory changes on
the economy. It is common for the estimates, taken into consideration especially the new Basel III / CRD IV requirements, that the impact on the economy,
capital markets, credit institutions and other actors on the financial sector is
significant. However, there is no impact assessment on the cumulative impact
on the economy and corporate finance of the regulatory reform as a whole.
According to EK's assessment the regulatory reform and new requirements for
the financial sector will cause additional costs, which in turn lead to tightening
of the terms and availability of corporate finance, among other effects. This is
due to such costs being ultimately transferred to be borne by the endcustomers.
The impact of the additional costs on long-term finance such as export and project finance as well as housing finance is further added due to the required
change of the financing structure of banks to rely more on more expensive
long-term financing. For example in Finland the financial market failure regarding export finance has already been considered to be of permanent nature due
to the increasing capital requirements. Therefore a specific public export credit
instrument relying on fund-raising by the state-owned Finnish official export
credit agency, Finnvera, is currently being established to facilitate provision of
export credit.
The experience of the companies is that in general the cost and availability of
products that involve balance sheet commitment from banks has worsened.
The willingness of European banks to fund transactions backed by export credit
agencies is weak. The regulatory reforms have pushed banks to become very
selective on the transactions they fund. This has again impacted negatively the
ability for the customer of the exporting companies to raise funding for export
transactions, affecting negatively also the recovery of economic activity. This
development has put European companies in a weaker competitive position as
particularly Asian banks are funding their own corporate sectors more competitively.
CONFEDERATION OF FINNISH INDUSTRIES EK
Competitiveness and Growth
Tommi Toivola
3 (5)
1 June 2012
In particular, also access to finance of more risky enterprises such as young
companies and investment in innovations weakens, since the risk-taking capability of the financial institutions decreases. It can be also argued that such
negative effects affect mostly SMEs who are more dependent of bank finance
than large companies.
This is supported by surveys among SMEs showing that the number of SMEs
facing difficulties in getting financing is at a higher level than before the financial crisis.
The regulatory reform leads to a significant need of additional own capital by
credit institutions unless they intentionally decrease their credit providing capability by reducing their balance sheet. However, at the same time and for the
same reason the investors' interest to invest in the credit institutions may decrease. The negative effect on the capital market is amplified from the capital
markets perspective due to disincentives for equity investments by insurance
companies.
New capital requirements may also lead to increasing demand for sovereign
debt while decreasing in particular the interest towards long-term corporate
debt. In addition, the significant need for new capital and changes in the capital
structure of the credit institutions as well as increasing public financing needs
may affect the debt markets negatively from the perspective of corporate fundraising.
At the same time with the capital reform a number of other regulatory proposals
relating to the financial sector affect corporate finance negatively. For example
the directive on alternative investment managers affects negatively the operational prerequisites of venture capital. Risk capital provided by venture capital
funds is in particular needed by start-up, young and innovative companies. In
addition, amendments in deposit guarantee scheme and proposals on stability
funds as well as financial transaction tax or other specific financial sector taxation would add on the costs of the financial institutions and consequently have
negative effect on the terms of finance of their customers, i.e. corporates, consumers and public entities.
EK reminds also that the proposal on cross-border crisis management is still
expected to be published as part of the regulatory reform. The targets of this
proposal should include enabling controlled cessation of non-viable banking activities, in a way that ensures the stability of the rest of the financial system and
without relying on an implicit public guarantee. Any government or other intervention needs to bring structural improvement to bank industry. This can include taking responsibility over problematic loans and receivables, but not restoring continuing business operations. Non-viable banks with uncompetitive
business models should not be supported to continue business.
CONFEDERATION OF FINNISH INDUSTRIES EK
Competitiveness and Growth
Tommi Toivola
4 (5)
1 June 2012
- What are your views with respect to structural reform of banking in general and in particular
with respect to the structural reform proposals to date (e.g. US Volcker Rule, UK ICB proposal)?
The stability of and public trust in the financial markets are essential for the
proper functioning of the market. It is also imperative to bring financial leverage
to a level that can be tolerated also under difficult macroeconomic times. Further, the capital markets need to be able to allocate capital in an efficient way
and credit institutions to provide finance for economic activity and growth.
The current and ongoing regulatory reform shares the same high-level target as
the work of the Working Group. Ongoing reform alone is very extensive, requires fundamental changes in the business logic of the market participants
and carries already a significant inbuilt risk for overregulation. EK's view is
therefore that new structural reform is not needed at the moment, as the ongoing reform is already serving the same purpose. Ongoing reform should be implemented and its effects on corporate finance and economy should be assessed in more detail prior to new proposals. Otherwise there will be more significant risks for negative side-effects on economy and growth.
One particular major area of concern is the competitiveness of the European
companies and capital markets if regulatory changes are implemented tighter in
Europe compared to the other competing economies. For example, in Europe
companies are more dependent on bank finance than in the United States. In
Finland banks are even more important source of finance for the companies
than in Europe on average. In addition, as stated above, particularly the Asian
banks are financing their corporate sector more competitively.
Regulatory reforms should not target the banks of a certain region, but should
cover all banks involved in a certain market place, otherwise the competitive
advantage of non-European competitors will widen via cheaper funding. More
and more banking will shift to non-European banks for those European corporates that can make a shift.
One key challenge with the regulatory reforms is the risk that the corporate sector requiring a wide range of different products will face uneven effects as the
needs of large European corporates and SMEs are different. The public funding
market is more easily reachable for large corporates, but not necessary for
SMEs. Bank finance is needed also in the future for companies of all sizes.
Banking industry has been an area of continuous development and has potential to make positive contribution to EU economy in the long run. The banking
services and products that corporations need have to evolve also in the future
and this should not be endangered by regulation.
The regulatory reform is also being implemented at the same time with expected recovery of the economy and economic growth. Possible bottlenecks in
CONFEDERATION OF FINNISH INDUSTRIES EK
Competitiveness and Growth
Tommi Toivola
5 (5)
1 June 2012
finance and additional costs therein may slow down investments and the development of the economy.
Regarding in particular the Volcker Rule in the US it can be noted that according to available information it has been difficult to be implemented in practice,
and decision on details of its application has been postponed. The universal
banking model as such did not cause the financial crisis and structural separation requirement for certain activities like the UK ICB proposal in would be likely
to cause significant competitiveness issues for EU contemplated above.
Do you observe and expect a shift away from bank finance to other sources of finance more
generally in the EU? What are the main constraints to such a shift?
Banks dominate a large share of financing to corporate customers. EK's assessment is that the regulatory reform will lead to increasing significance of
fund-raising by issuing securities and to increasing demand for non-bank lending.
However, the types of corporate customers facing high impact from the regulatory reform, such as SMEs, start-ups and high-growth companies, also face
high threshold for entry into the capital markets. Therefore these financing
sources are typically mostly used by larger corporates. Possible increasing interest towards issuing securities should thus not be interpreted to be a direct
substitute means of finance. In the future corporate bonds and other alternative
means of finance should also be encouraged.
For larger corporations, constraints to such a shift are also the capacity and liquidity of the public debt-market and non-bank lenders.
How do you value the ability to engage in "one-stop-shopping" for all your banking needs?
From the customer perspective separation of different banking operations
structurally would obviously make it more difficult to receive relevant financial
services from one service provider. This would also lead to loss of economic
benefits received due to a larger service portfolio as well as costs due to provision of information and connectivity to several service providers. The same
holds true also for the benefits for the customer or the bank itself that are derived from netting the capital requirements for different operations, i.e. the end
result would be less effective use of capital. In addition, from the bank's perspective not having the full picture of the customer's financial needs could
mean that whole picture of the customers financial position and related risks
becomes opaque.
In addition to one-stop shopping, larger corporate customers value also the
possibilities to diversify banking services and the possibility to have competitive
offers for the services from time to time.