It’s time for a European edition of the SEC, says Christine Lagarde, president of the European Central Bank (ECB).
In a speech at the European Banking Congress in Frankfurt, Lagarde made the case for creating a strong single regulator to facilitate the development of a unified capital market in the region.
While a capital markets union (CMU) has long been a policy goal for Europe, it has failed to advance, she said.
“[It] is clear that the conditions for capital markets to develop in Europe have not yet been satisfied. Most importantly, we have lacked a unifying project around which CMU can be anchored,” she said.
At the same time, the region is facing a collection of common challenges, such as deglobalization, demographics and decarbonization. “Addressing all these challenges at the same time will require a generational effort — and massive investment is needed in a short space of time,” she said.
Yet, Europe’s capital market remains fragmented, Lagarde noted.
“We will not succeed in these transitions if we don’t get CMU back on track,” she said.
To date, policymakers have relied on removing barriers between local markets. “But it is clear that this strategy has not provided sufficient incentives for stakeholders to build a European market,” she said.
Now, Lagarde argued, is the time for a “top down” approach, similar to the creation of the U.S. Securities and Exchange Commission (SEC) in the 1930s, which “played a pivotal role in suppressing state efforts to fragment securities markets.”
“The European Securities and Markets Authority (ESMA) does some of that in the EU, but it is not truly single. Supervision remains largely at the national level, which fragments the application of EU rules. In fact, enforcement powers are often split across several national regulators,” she said.
“Creating a European SEC, for example by extending the powers of ESMA, could be the answer. It would need a broad mandate, including direct supervision, to mitigate systemic risks posed by large cross-border firms and market infrastructures such as EU central counterparties,” she said.
Alongside a European SEC, a single rulebook “is also key,” she stressed.
“To mitigate fragmentation in EU capital markets, a more ambitious approach should involve the creation of a single rulebook enforced by a unified supervisor. That would empower private entities to expand their ambitions in fostering high-growth private investments,” Lagarde said.
“Faced with such an immense financing challenge, the moment for action is now. So I encourage all of us to be bold and not to let this moment pass,” she concluded.