EUROPE – The European Commission, in its Green Paper on long-term financing, has stressed the importance of ensuring that any new prudential rules for occupational pension schemes "do not discourage" long-term financing.
Unveiling a three-month public consultation on how to foster long-term financing and improve the system of financial intermediation in Europe, Michel Barnier, internal market and services commissioner, said the paper would help identify "what barriers exist to long-term financing and what more can be done to overcome them".
The paper, referring specifically to the forthcoming review of the Institutions for Occupational Retirement Provision (IORP) Directive, said: "It will be important to ensure that any new prudential rules for occupational pension schemes do not discourage long-term financing.
"The review of the IORPs Directive will therefore need to take into account the potential impacts on long-term financing and economic growth."
The Commission also pointed out that it has asked the European Insurance and Occupational Pensions Authority to examine whether the calibration of capital requirements for investments in "certain asset classes" under Solvency II should be adjusted.
These would include infrastructure financing, SME financing and debt securitisation, among others.
More generally, the paper argues that the long duration of pension funds and insurance undertakings should allow such institutional investors to take advantage of long-term risks "at least in principle" and thereby help rein in "short-termism".
The potential funds in the EU from relevant institutional investors, including also mutual funds and endowments, are estimated at around €14trn, according to the paper.
As for the actual "very significant" long-term financing needs for the EU economy, they add up to around €24trn for the period up to 2020, it estimated.
Barnier's position is that it is important to improve the ability of institutional investors such as insurers and pension funds to channel finance towards such long-term investments.
The paper states that asset classes appropriate for long-term investment typically involve "patient" capital requiring "intrinsic project and implementation risk".
It also notes that many commentators consider that quarterly reporting creates the wrong incentives for investors by imposing an obligation that may push market participants to focus on very short-term results.
It therefore proposes, in the review of the Transparency Directive, the lifting the obligation for quarterly reporting.
On taxation, the paper advocates further discussions on the design of corporate tax bases, and argues that the controversial financial transaction tax, proposed in 2011, could "indirectly support long-term financing by penalising undesirable and speculative short-term financial market transactions".
The Green Paper follows last year's Kay Review commissioned by the UK government, which also aimed to promote "long-termism" in European capital markets.
At the launch of the paper today, the Commission argued that the one main lesson of the financial crisis was that "appropriate regulation and supervision of the financial sector is necessary to restore financial stability and confidence in the markets".
Vice-president Olli Rehn, responsible for Economic and Monetary Affairs, said: "The necessary rebalancing process in the European economy is underway, and financial markets should be able to support the accelerating structural change."
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