Commission reports on progress in risk reduction in the Banking Union and calls for faster progress on Capital Markets Union ahead of EU Leaders’ meetings

Financial stability has been considerably reinforced in recent years and risk reduction in the EU banking sector is continuing at a sustained pace, as outlined by the Commission in two Communications ahead of the December European Council and Euro Summit, where decisions on the deepening of Europe’s Economic and Monetary Union should be taken. At the same time, the work on financial stability and integration needs to continue, and it is now time for the co-legislators to agree on all key outstanding files.

In its third progress report on the reduction of non-performing loans (NPLs) the Commission highlighted today that NPLs in the European banking sector have declined further, now standing at an EU average of 3.4%. While efforts need to continue to address legacy issues still weighing on the sector since the financial crisis, this development is very encouraging. In a separate Communication, the Commission also calls for renewed political engagement and efforts to complete key building blocks of the Capital Markets Union (CMU) ahead of the European elections next May. Together with the completion of the Banking Union, this is essential for the development of Economic and Monetary Union and strengthening the international role of the euro.

“Working out the high stocks of non-performing loans is part of efforts to reduce risks in the European banking sector. We are also expecting swift agreements on the Banking and NPL packages. On the basis of the progress achieved on the risk-reduction side, I invite EU Finance Ministers and leaders to agree on concrete risk-sharing measures in December. Stronger Economic and Monetary Union is in the interest of each and every one”, said Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union. “The Capital Markets Union has a key role to play in strengthening Europe’s Economic and Monetary Union and the euro. More integrated financial markets will be able to better absorb shocks before they reach the taxpayer. Deeper and more liquid capital markets in Europe will also lead to wider use of the euro by market participants in their daily operations,” Dombrovskis added.

Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness said: “Capital Markets Union is about broadening access to finance for small and medium size companies, and to increase investment opportunities in Europe. We want businesses and citizens to fully benefit from the potential of the Single Markets for banking and financial services. This is why we count on the support of the European Parliament and the Council to agree swiftly on the outstanding measures we proposed under the Banking Union and Capital Markets Union agenda.”

Banking Union 

As the Commission emphasised in its October 2017 Communication, the Banking Union should be completed by achieving risk reduction and risk sharing in parallel. Today, the Commission reports for the third time on the progress achieved on risk reduction efforts. Non-performing loans (NPLs) ratios in the European banking sector continued to decline in the first half of 2018, to an average of 3.4%, and are approaching pre-crisis levels again. This confirms the overall trend of improvement across the Union in recent years, which has been possible thanks to determined action by Member States and market players, notably in countries with relatively high NPL levels. While this is encouraging, high NPL ratios remain a challenge in some Member States. Today’s Report will inform the discussions at the December Euro Summit (in inclusive format) on the reinforcement of the European Stability Mechanism and the completion of the Banking Union, including setting up a common backstop to the Single Resolution Fund and further steps towards a European Deposit Insurance Scheme.

The Commission also welcomes progress in trilogues on the November 2016 banking risk reduction package and calls on the European Parliament and the Council to agree swiftly on it, as well as on the March 2018 comprehensive package of legislative measures to tackle NPLs. The Communication also confirms that the Commission has delivered all elements of the Council’s Action Plan on non-performing loans from July 2017. The Communication is accompanied by a staff working document prepared by the Commission services, at the request of the Council, on the potential set-up of a European NPL transaction platform, an electronic marketplace where banks and investors could trade NPLs and NPL portfolios.

Capital Markets Union

Completing the Capital Markets Union (CMU) is essential to make Member States’ economies and Economic and Monetary Union more resilient, to safeguard financial stability, strengthen the international role of the euro and diversify sources of finances for small and medium-sized companies in particular. The Capital Markets Union will offer more choice to consumers, allowing them to buy cheaper and better investment products, and will enable financial services providers to scale up by offering their services in other Member States.

In today’s Communication, the Commission recalls the key CMU building blocks it has delivered over the past three years. These include important proposals for the creation of new opportunities across the Single Market for businesses and investors through new EU-wide products and services, through simpler, clearer and more proportionate rules, as well as a more efficient supervision of the financial industry. So far, 10 out of 13 proposals putting in place the building blocks of the CMU are still under discussion by the EU co-legislators. Three proposals on sustainable finance and three other proposals that are important for EU financial markets are also still pending. The Commission calls on the European Parliament and the Council to put in place all main building blocks for a complete Capital Markets Union before the European Parliament elections in May 2019.The December European Council is invited to endorse these efforts, which are essential not only for completing Economic and Monetary Union and the Banking Union, but also for the Single Market, as highlighted in a Communication of 22 November.

Background

The Banking Union together with the Capital Markets Union promotes a more integrated and stable financial system in the European Union. They increase the resilience of the Economic and Monetary Union against adverse shocks by substantially facilitating private risk-sharing across borders, while at the same time reducing the need for public risk-sharing.

In order to make progress on completing the Banking Union by accelerating risk reduction in the EU banking sector, the Commission proposed in March 2018 a package of actions to tackle non-performing loans. Those actions target four key areas: ensuring that banks set aside funds to cover the risks associated with loans issued in the future that may become non-performing; encouraging the development of secondary markets where banks can sell their NPLs to credit servicers and investors; facilitating debt recovery, as a complement to the insolvency and business restructuring proposal put forward in November 2016; and assisting Member States that so wish in the restructuring of banks, by providing non-binding guidance for establishing Asset Management Companies (AMCs) or other measures dealing with NPLs.

The Capital Markets Union (CMU) seeks to better connect savings to investment and to strengthen the European financial system by enhancing private risk-sharing, providing alternative sources of financing and increasing options for retail and institutional investors. The CMU, part of the third pillar of the Commission’s Investment Plan for Europe, is essential to delivering the Juncker Commission’s priority to boost jobs, including youth employment, and growth. The Commission has delivered all the legislative proposals it announced in the CMU Action Plan of September 2015 as well as in its mid-term review of June 2017. The Commission calls on the co-legislators to act now, before the European Parliament elections in 2019, to put in place all the necessary key building blocks for a complete Capital Markets Union.