Roberto Gualtieri’s speech during presentation of OECD report ‘Capital Market Review of Italy 2020’
dear colleagues and friends,
it is my great pleasure today to open this event, dedicated to the presentation of Italy Capital Market Review 2020 prepared by the OECD.
I wish to start by thanking Mr. Valdis Dombrovskis and Mr. Angel Gurría for this project, the distinguished panellists for joining us on this very important occasion, the OECD team for the excellent work they put together, and those in charge of the organization of this event.
A couple of words on the method.
Our financial markets are extraordinarily complex, which makes economic analysis of them exceedingly difficult. Since there is no absolutely “right” answer to most policy problems, what good analysis does is raise the quality of policy debate and decision making.
To trigger structural reforms we need pragmatism grounded in market feedback.
And this report is an example of a solution-oriented tool that advance practical recommendations for meaningful policy improvement.
I am also particularly glad that the analysis that we are discussing today is coming under the umbrella of the Structural Reform Support Service (SRSS) of the European Commission.
I cannot emphasize enough the importance of such a program in creating the building blocks of the European single market, as the economic and monetary union depends on the strength and resilience of the economies and the administrations of each Member States.
My Ministry aims to take advantage of the precious support of the European Commission also in other two important areas of EU policy agenda with the goal/ambition to make our country up to speed with the latest developments. I am referring to digital payments and to the transition from brown to green economy (I will get back to sustainability in a while).
We all know that public markets have a critical role in creating wealth for the society.
A stronger reliance on public equity funding is beneficial in two way:
- It is an economy that work for people. It allows the widest circle of private individuals, i.e. citizens of the European Union, to participate and profit from the growth of the European corporate sector directly or indirectly through collective investment schemes, like pension funds or mutual funds.
- At the same time opening up the public markets for smaller companies with growth potential would result in accelerated wealth creation.
We also know that despite some important structural reform, the Italian capital market is still less developed than many other advanced economies.
Italian companies, especially small and medium ones’ (SMEs) continue to over rely on bank lending compared to market-based instruments.
So in a very humble effort to contribute to the debate on the right policy course of action, I would like to share some thoughts on:
- what I believe should be the next priorities for the CMU
- how Italy can contribute (and is already contributing) to their fulfilment.
The EU regulatory framework reached a commendable level of technical advance, in both banking and capital markets area. On top of that, Capital Markets Union, which Italy fully support, is going in the right direction at boosting the ability of all businesses to access different sources of market-based financing, while keeping investors protected.
We should be more ambitious: most CMU measures are focusing on the development of capital markets but sometimes falls short in creating a union of them. We have the single rule book but not yet the single market.
So what should be our top priorities for the new mandate?
FIRST: MORE PROPORTIONALITY
We need to smooth in a more efficient way how all the players of the ecosystem (companies, investors, market infrastructures) interact with each other, on a cross border basis.
PROPORTIONALITY FOR SMEs
And one way to do that, in my view, is by fixing some frictions of current European and national regulation and devise a more proportionate and simplified regulatory environment.
Investor protection is important (as it naturally enhances market efficiency because it fosters liquidity and reduces adverse selection), but regulatory measures need to be calibrated in a proportionate way, to avoid the risk that excessive regulatory burdens squeeze smaller firms out of the market.
SME markets are particularly prone to this risk because compliance costs have a relevant fixed component and are therefore inevitably regressive.
Current EU securities and financial law in the SMEs realm, sometimes falls short of delivering a satisfactory equilibrium between investor protection and market efficiency. Examples range from prospectus, to investment research, from disclosure of price sensitive information to take overs.
To deliver a smooth and flexible regulatory regime, we might consider starting from the practical things.
It would be wise in this sense to sketch out, in the framework of the Capital Markets Union, a brand new single rule book tailored on SMEs, starting from the same definitions (today there are inconsistencies on how to define an SME depending of the single piece of regulation) and more harmonized procedures (listing-delisting regime, liquidity provisions). A tailored rulebook would simplify the regulatory environment, may improve market participation and could create the conditions for greater market integration at the EU level.
In this context it would be appropriate to build up a single information hub at EU level to streamline the collection and the utilisation of standardized data on SMEs.
PROPORTIONALITY FOR INVESTORS
Some more proportionality would be helpful also on the investor side.
Certain type of investors (the high net worth) are struggling to put their money into long term and illiquid asset (those who invest in real economy) due to some European legislative requirements that in light of the investor protection goal may have a dis-incentivizing effect.
Again, investor protection is non-negotiable but let’s make sure we are not overshooting.
I support the idea of carrying out at EU level an impact assessment of several pieces of legislation on investors’ access to markets. The same exercise should be done at national level as there are provisions that make difficult for those investors to access certain type of asset class (alternative investments fund that invest for example in real economy).
SECOND – REBALANCING EU REGULATORY AND SUPERVISORY ARCHITECTURE
Companies also consider the regulatory burden in terms of inconsistencies in the application of the rules and the complexity in their interaction with supervisory authorities.
IMPROVE QUALITY OF THE RULEBOOK
With this regard, on the one hand we need to keep working on the quality of the European rulebook and its ability to evolve.
That is why we should start thinking at a new European Consolidated Financial text that, overcoming the current “silos” approach in EU rulemaking, would include banking, securities and insurance rules.
I realize it’s very ambitious but I believe it is an inevitable outcome as we know from the real world that traditional sectors of the financial industry are blurring into each other.
REBALANCE EU SUPERVISION
Secondly, having the single rule book is pointless if the same rule is applied differently across member State.
A true European single market cannot tolerate that the same bond issuance is treated differently by different supervisory authorities.
That’s why, together with a modernization of the rulebook, it is of paramount importance to adjust the European supervisory architecture, promoting a more centralization of authorization and supervisory powers and a better articulation of supervisory responsibilities between home and host Member State authorities.
In this sense I believe that ESMA should shift from a regulatory body to a supervisory one, taking advantage of the new tools that ESAs review package designed to foster supervisory convergence.
The end point would be a more coherent application of the single rule book and less forum shopping.
In the long run, the ESAs review should no longer be carried out by the three authorities at the same time. We should focus more on ESMA given CMU and Brexit in two way: boost its governance
Greater convergence in the supervisory area within the EU27 would speed the integration of EU financial markets and facilitate the post-Brexit establishment in a “multi-polar” EU27 market of financial-sector actors.
Given the heterogeneity of market players and products, a variable geometry would be nonetheless required.
This implies that national supervisory authorities, as the OECD review clearly points out, need to be fully equipped to respond efficiently and in a timely manner to the new geography of financial activities.
THIRD: FOCUS ON INVESTORS
European household are great savers but still reluctant to market-based investments.
Italy in this sense is a very peculiar example.
It is widely known that Italian households exhibit a significant amount of wealth. The net wealth of Italian households is 8.4 times the size of their disposable income, measured gross of depreciation. According to OECD data, this ratio is higher than that of households in France, the United Kingdom and Canada.
At the end of 2017, the net wealth of Italian household stood at €9,743 billion, among which €4,374 billion are financial assets (around 41% of the total asset). A significant part (around 35%) of the financial asset is represented by cash and deposit (Source: Bank of Italy)
In a line. Italians are very good savers but not so good investors.
Italian household participation rate in financial markets remains pretty low, with mutual funds and Government bonds appearing the most significant holdings in household portfolios after bank and postal savings. Likewise Italian private wealth (which incidentally is steadily growing), compared to other regions, is very low invested in alternative and illiquid asset class (so called “private market”), as I said the ones that invest in real economy and that has a huge potential of growth giving the overall macroeconomic situation.
The overall wealth currently left in saving accounts and deposits could be potentially invested in capital market.
According to a very recent research (Politecnico di Milano, Intermonte, Associazione Italiana Private Banking, 2019), Italian households already invest in real economy an overall amount of 1.305 billion, one third of that (445,6 billions) in companies not directly owned.
We can do better.
A key instrument to channel savings to effective capital market products are investment products.
SMEs funding, for instance, should be boosted, even with fiscal stimulus, by favouring specialized instruments, as it has been the case for years in the UK.
This would attract first institutional investors then households.
In this way, savers and institutional investors may invest fully aware of their illiquidity which is a feature, not necessarily a flaw.
In this regard, one of the suitable instruments to be favoured is ELTIF as it allows to cater to the need of a wide investor base – from large institutions to potential segment of retail investors – while keeping the ability to invest in companies of different stages on a cross border fashion.
Furthermore, by investing in education.
Education pays the best dividends.
This is crucial to develop an equity culture that is still missing in Europe and in our country as well.
We also need further education directed to both companies and investors about the benefits of public equity finance.
Given the current low interest rate environment, Italian households need to be better aware of the potential upsides of investing in SMEs, rather than primarily keeping personal savings in bank accounts.
Education is crucial for companies as well.
At the same time, we should keep raising awareness among business owners and top management on the importance of thinking long term, opening up to different financing options (complementary to the banking one) and developing internally sound corporate governance.
FOURTH: COMPLETING BANKING UNION
Capital Markets Union cannot work without a proper Banking Union.
Completing Banking Union is crucial for the success of Capital Market Union given the link between the money market and the rest of capital markets, and the importance of banks in market making activities. Market making plays a crucial role in the functioning of capital markets that finance the economy. It is key to ensuring a liquid secondary market in equity and debt, which is a determining factor in the premium required by investors to invest in a bond or a share, hence in the cost of capital for states and companies.
In pursuing those improvements we should take into careful consideration three factors: i. the delicate relationship between the single market and the local ecosystem; ii. a new emerging financial paradigm; iii. Sustainability
Integrate local ecosystem into single market
Concerning the first, the EU primarily needs to keep enhancing market finance in several of its markets before its capital markets union can be unified. And it needs to that with a neutral approach: what works in the Silicon Valley may not work in Germany, and that what works in Germany may not work in Milan.
Diversity and adaptation to specific local circumstances will thereby need to continue to co-exist with more integration. Proportionate rules will need to allow for growth of local markets while ensuring high standards of regulation and effective of supervision.
This would help the Capital Markets Union deliver better results.
New financial paradigm
The new financial paradigm has 3 main feature
INCREASINGLY ROLE OF PRIVATE MARKETS
Corporate financing is going through interesting structural changes. According to OECD, we are witnessing a declining attractiveness of stock markets (except for Asia) counterbalanced by a growing role of private equity and an increased capacity, scale and variety of private capital markets. Given the new design of the funding escalator, going public is no longer the only route.
Private markets will become the new public markets? It is an interesting development that need to be carefully assessed also for the risks it may poses (in term of transparency and democratic access to them)
INCREASINGLY ROLE OF PASSIVE INVESTMENTS
On the investor side, there has been growing role of investment strategies such as passive indexing and investment vehicles such ETFs (exchange traded funds).
DISRUPTION BY INNOVATION
On top of that, the innovations made possible by new technologies has helped to develop alternatives to the traditional markets. The digitalisation of assets, the use of blockchain network technologies to modernize market infrastructures and cut out the “middle man”, the emergence of “marketplace investing" models offering a broad range of services, and the automation of processes through intensive data use are all accelerating the transformations at work in the financial industry.
Whilst the economy plays an important factor in support of well-functioning markets, more recently, the EU has recognised that sustainability and the transition to a safer, carbon neutral, and climate resilient economy will contribute towards long-term competitiveness in the European economy. Whilst there is overwhelming support for the move, it will require high levels of investment, a large part of which will have to be made by the private sector, more specifically by companies. Equity markets and efficient IPO mechanisms will be of utmost importance for the success of such a profound transformational process.
I am glad to say that Italy is on the right track.
We are going to launch a permanent business desk, that will work as single point of entry for companies and investors for discussing together with the policy maker issues and actions that need to be taken.
I would also like to mention the efforts we made in the last Budget Law in easing the transition from brown to green economy from different angles.
We widened the incentives already in place to support the Impresa 4.0 program, in order to take into consideration sustainability issues.
The Treasury will also start issuing sovereign green bonds with the aim to raise funds to support investments in the field of environmental sustainability.
The placement of those bond will be linked to public spending provision foreseen in the national budget law and will be followed by a system of external certification to assess the environmental impact of the funded interventions and a set of reporting disclosure to investors.
A new inter-ministerial Committee will take place to coordinate public administrations job in monitoring those investments.
Developing capital markets financing for SMEs is crucial but it should take into account the way in which the financial world is changing and its new priorities.
The answers will not come only from easing regulatory constraints or reshuffling the supervisory architecture, but will involve the development of a comprehensive and diversified vision of financing in Europe, that takes into account differences in market depth and reconciles the development needs of companies with those of market robustness and integrity to attract investors.
What we need to do is taking advantage of the political momentum to make the Capital Markets Union a reality for EU citizens and companies, fostering integration (cross border and cross sector) while preserving national peculiarities.
In this context Italy has been working hard in pursuing CMU objectives and developing a more diverse funding escalator ecosystem already going in the direction of the OECD report
I would like to remember that we introduce fiscal incentive to ease SME listing costs, lower tax costs of mini-bond issuances. We intervened on the investor side through exemptions from capital gains linked to investments into real economy (PIR and Eltif). The last Budget Law reintroduce the Allowance for Corporate Equity as the OECD report recommended. Without mentioning the two investment arms of my Ministry: Fondo Italiano Investimenti and Cassa Depositi e Prestiti both very active in nurturing innovation and venture capitalism.
In a word, we are keeping the CMU goals very close to our agenda and we keep working along that route relaunching in the following weeks the Finanza per la Crescita 2.0.