Some secrets are so secret that no one knows about them. Until recently that described the secrets locked within our DNA. But a key to consumer confidence in the burgeoning genetic testing marketplace is the extent to which people can depend on a company’s promise that “Your secret’s safe with us.” In its first case focused on the privacy and security of genetic information, the FTC alleges that San Francisco-based Vitagene, Inc. – now known as 1Health.io – failed to live up to its promises and unfairly changed material privacy terms without customers’ consent. The proposed settlement and other recent actions send a loud-and-clear message that the FTC is fully committed to the protection of consumers’ health information.
After consumers paid between $29 and $259, sent a saliva sample to Vitagene, and answered an online questionnaire about their health history, family history, and lifestyle, the company provided them with a personalized Health Report. The Report included the customer’s full name and an assessment of their risks for developing a host of health problems.
Using images of locks, keys, and secure clouds, the company’s website was replete with claims about the care with which it promised to handle consumers’ genetic information. Here are just a few of the company’s pledges.

“We use industry standard security practices to store your DNA sample, your test results, and any other personal data you provide.”
“Rock–solid Security. We use the latest technology and exceed industry-standard security practices to protect your privacy.”
“Vitagene collects, processes, and stores your personal information in a responsible, transparent and secure environment that fosters our customers’ trust and confidence.”
“You’re in control of your data.  You can delete your data at any time. This will remove your information from all of our servers.”

“Three of the ways we protect your privacy:  1. Your results and DNA sample are stored without your name or any other common identifying information. 2. Vitagene destroys your physical DNA saliva sample after it has been analyzed. 3. We don’t share your information with any third party without your explicit consent.”

Nice privacy and security talk, but according to the FTC, Vitagene was more talk than action. You’ll want to read the complaint for details, but part of the story started in the cloud. As a component of its IT infrastructure, Vitagene used a well-known cloud service provider for storing confidential information, including consumers’ Health Reports and DNA data. Vitagene allegedly didn’t use built-in measures to secure the information and instead stored it in “buckets” that made it possible for anyone with internet access to see the detailed Reports of nearly 2,400 Vitagene customers. Also accessible: raw genetic data of at least 227 other customers, sometimes identified by first name. While Vitagene promised to “exceed industry-standard security practices,” the FTC says the company didn’t encrypt that data, didn’t restrict access to it, didn’t monitor access, and didn’t inventory it to help ensure its security. The complaint also charges that Vitagene didn’t take steps to ensure that a lab that analyzed many of the DNA samples had a policy in place to destroy them.
What’s more, the complaint alleges that over a two-year period, Vitagene received three separate warnings that it was storing customers’ health and genetic information in a way that made it publicly accessible. Warning #1: a July 2017 message from the cloud service provider that Vitagene had configured its data “to allow read access from anyone on the Internet.” The email included links to an account console and information about how to restrict access. The response from Vitagene: Crickets.
Warning #2 came from a security company that conducted a web app penetration test in November 2018 and “found that uploaded DNA data was being stored . . . without any access controls.” The complaint alleges that Vitagene again failed to rectify the situation.
Warning #3 was a June 2019 email from a security researcher sent to Vitagene’s support inbox. After the researcher contacted the media, the FTC says the company finally investigated its public exposure of customers’ health information. However, because Vitagene hadn’t monitored who had accessed or downloaded the data, it couldn’t determine who else might have seen the information.
Vitagene’s alleged missteps didn’t end there. In 2020, the company changed its privacy policy by retroactively expanding the types of third parties with which it may share consumers’ data to include grocery chains, dietary supplement manufacturers, and the like. And it did that without notifying customers who provided their data under the former, more restrictive privacy policy and getting their consent.
The complaint charges that the company’s promises that it exceeded industry security standards, stored DNA results without identifying information, deleted data at consumers’ request, and saw to it that physical DNA samples were destroyed were false or misleading. What’s more, the FTC alleges that the company’s after-the-fact privacy policy changes about sharing sensitive personal information with third parties was an unfair practice, in violation of the FTC Act. While Vitagene’s original privacy policy stated that a customer’s access or use of the company’s services after the company posted a revised privacy policy meant that the consumer had accepted the revised terms, that language didn’t  excuse Vitagene from its obligation to give notice and get consumers’ consent before making material retroactive changes to its privacy practices. Furthermore, the complaint alleges that Vitagene’s conduct was unfair even though the company has not yet implemented the broader information sharing practices set forth in its revised privacy policies.
To settle the case, 1health.io has agreed to implement a comprehensive information security program, including every-other-year third-party assessments. In addition, a senior executive must certify annually that the company is complying with the terms of the settlement. The proposed settlement also includes a $75,000 financial remedy. Once the settlement appears in the Federal Register, you’ll have 30 days to file a public comment.
What can other companies take from the FTC’s action?
Sensitive health information – including genetic data – requires intensive care.  If your company collects or maintains consumer health information, you’ve raised the bar on the privacy and security standards you must implement. Take particular care to substantiate the promises you make about your data practices. (By the way, if you haven’t read the FTC’s May 2023 Policy Statement on Biometric Information, set aside time now.)
Just because data is in your possession doesn’t mean it’s yours.  Collecting consumers’ data doesn’t mean you’re free to do with it as you please. Consumers have a right to know in advance how you intend to use their information and you have the legal obligation to live up to your representations. That means if you want to change your practices down the road, a bait-and-switch modification to your privacy policy won’t suffice. You’ll need consumers’ affirmative express consent for any new uses of their data.
When it comes to security, keeping your data in the cloud doesn’t mean you can keep your head in the clouds.  The FTC has long said that storing data in the cloud doesn’t give a company a free pass on security. It’s still your responsibility to take reasonable steps to secure your data – for example, by properly configuring cloud security settings and by inventorying and auditing your cloud storage. As the FTC’s Request for Information about cloud computing makes clear, sellers of cloud technology and the companies that use their services share the responsibility to secure consumers’ personal information.
Respond to credible warnings about potential security lapses. The complaint against Vitagene alleges multiple instances in which the company failed to heed alarms others – including the provider of its cloud storage – had sounded about the security of its cloud-based information. Do you have systems in place to make sure those alerts get to the right people and get the immediate attention they deserve?
Compliments of the Federal Trade Commission.The post FTC | Privacy and security of genetic information: Putting DNA companies to the test first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has informed Google of its preliminary view that the company breached EU antitrust rules by distorting competition in the advertising technology industry (‘adtech’). The Commission takes issue with Google favouring its own online display advertising technology services to the detriment of competing providers of advertising technology services, advertisers and online publishers.
Google is a US multinational technology company. Google’s flagship service is its search engine Google Search. Google also operates other popular services, such as the video streaming platform YouTube or the mobile operating system Android. Google’s main source of revenue is online advertising: (i) it sells advertising space on its own websites and apps; and (ii) it intermediates between advertisers that want to place their ads online and publishers (i.e. third-party websites and apps) that can supply such space.
Advertisers and publishers rely on the adtech industry’s digital tools for the placement of real time ads not linked to a search query, such as banner ads in websites of newspapers (‘display ads’). In particular, the adtech industry provides three digital tools: (i) publisher ad servers used by publishers to manage the advertising space on their websites and apps; (ii) ad buying tools used by advertisers to manage their automated advertising campaigns; and (iii) ad exchanges where publishers and advertisers meet in real time, typically via auctions, to buy and sell display adds.
Google provides several adtech services that intermediate between advertisers and publishers in order to display ads on web sites or mobile apps. It operates (i) two ad buying tools – “Google Ads” and “DV 360”; (ii) a publisher ad server, “DoubleClick For Publishers, or DFP”; and (iii) an ad exchange, “AdX”.

Image courtesy of the European Commission.
Statement of Objections on Google’s practices in adtech
The Commission preliminarily finds that Google is dominant in the European Economic Area-wide markets: (i) for publisher ad servers with its service ‘DFP’; and (ii) for programmatic ad buying tools for the open web with its services ‘Google Ads’ and ‘DV360′.
The Commission preliminarily finds that, since at least 2014, Google abused its dominant positions by:

Favouring its own ad exchange AdX in the ad selection auction run by its dominant publisher ad server DFP by, for example, informing AdX in advance of the value of the best bid from competitors which it had to beat to win the auction.
Favouring its ad exchange AdX in the way its ad buying tools Google Ads and DV360 place bids on ad exchanges. For example, Google Ads was avoiding competing ad exchanges and mainly placing bids on AdX, thus making it the most attractive ad exchange.

Image courtesy of the European Commission.
The Commission is concerned that Google’s allegedly intentional conducts aimed at giving AdX a competitive advantage and may have foreclosed rival ad exchanges. This would have reinforced Google’s AdX central role in the adtech supply chain and Google’s ability to charge a high fee for its service.
If confirmed, those conducts would infringe Article 102 of the Treaty on the Functioning of the European Union (‘TFEU’) that prohibits the abuse of a dominant market position.
The Commission preliminarily finds that, in this particular case, a behavioural remedy is likely to be ineffective to prevent the risk that Google continues such self-preferencing conducts or engages in new ones. Google is active on both sides of the market with its publisher ad server and with its ad buying tools and holds a dominant position on both ends. Furthermore, it operates the largest ad exchange. This leads to a situation of inherent conflicts of interest for Google. The Commission’s preliminary view is therefore that only the mandatory divestment by Google of part of its services would address its competition concerns.
The sending of a Statement of Objections does not prejudge the outcome of an investigation.

Image courtesy of the European Commission.
Background
Article 102 of the TFEU prohibits the abuse of a dominant position. The implementation of these provisions is defined in the Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by the national competition authorities.
On 22 June 2021, the Commission opened formal proceedings into possible anticompetitive conduct by Google in the online advertising technology sector
A Statement of Objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. The Commission informs the parties concerned in writing of the objections raised against them. The addressees can examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing to present their comments on the case before representatives of the Commission and national competition authorities. Sending a Statement of Objections and opening of a formal antitrust investigation does not prejudge the outcome of the investigations.
If the Commission concludes, after the company has exercised its rights of defence, that there is sufficient evidence of an infringement, it can adopt a decision prohibiting the conduct and imposing a fine of up to 10% of the company’s annual worldwide turnover.
Where the Commission, finds that there is an infringement of Article 101 or of Article 102 of the TFEU, it may by decision require the company concerned to bring such infringement to an end. For this purpose, it may impose on them any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the company concerned than the structural remedy.
There is no legal deadline for bringing an antitrust investigation to an end. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertakings concerned cooperate with the Commission and the exercise of the rights of defence.
Compliments of the European Commission.The post EU Antitrust: Commission sends Statement of Objections to Google over abusive practices in online advertising technology first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

EU health ministers have set out the Council’s position on a regulation to modernise and simplify the structure of the fees payable to the European Medicines Agency (EMA) to better reflect the evolving demands and challenges it faces. The general approach approved today will enable the Council to start negotiations with the European Parliament.

The European Medicines Agency and national competent authorities play vital roles in protecting and promoting public and animal health. Today EU health ministers endorsed an approach that will enable this work to continue, supported by a fee system that is modern, straightforward and sufficiently flexible to adapt to future developments.
Jakob Forssmed, Swedish Minister for Social Affairs and Public Health

Aims of the new rules
The proposed regulation aims to update the existing legislation governing fees charged by EMA. It will ensure that fees and remuneration are cost-based, flexible, and ensure adequate funding to guarantee the future sustainability of operations of the EMA while also providing sufficient support to member states’ national competent authorities (NCAs). The proposal also seeks to reduce the complexity of the current legal framework.
Why does EMA’s fee structure need updating?
EMA plays a crucial role in evaluating and supervising medicines, with the wider goal of benefitting human and animal health.
In order to deliver on its mission, the agency needs a sound financial basis to support its operations, yet the existing fee structure is increasingly complex and no longer reflects the nature of the work and challenges involved. It is also necessary to remunerate the fundamental contribution of NCAs in a sustainable way.
The position of the Council
The Council’s general approach maintains the key elements of the Commission’s proposal, including the transition to a cost-based approach. Nevertheless, it fine-tunes the provisions for adjusting EMA’s fees and remuneration, ensuring that NCAs’ costs will be covered.
The general approach also clarifies some of the measures relating to flexibility, which allow for further changes to be made to the fee system at a later date. Specifically, the Council has expanded the role of EMA’s management board updating the fees.
Next steps
Today’s general approach provides the upcoming Spanish presidency of the Council with a mandate to begin negotiations with the European Parliament, with a view to reaching a provisional agreement.
Background
EMA’s existing fee system has been in place for almost two decades, during which time it has become increasingly complex. A recent evaluation of the system identified five key issues, including misalignment of some of the fees with the underlying costs, a lack of remuneration for certain procedural activities, and discrepancies between relevant legal provisions.
On 13 December 2022, the Commission published a proposal for a regulation revising the existing EMA fees system. The proposal has three objectives:

to move from a flat-rate system to a cost-based system for EMA fees
to ensure the sustainability of the European regulatory network formed by the EMA and National Competent Authorities (NCAs)
to simplify existing legislation by merging the content of the two current EMA fee regulations for pharmacovigilance and non-pharmacovigilance fees into one single legal instrument

Health ministers discussed the proposal and the Council’s position at the EPSCO Council on 14 March 2023.
Compliments of the European Council, the Council of the European Union.The post European Medicines Agency: EU Council agrees approach on a more modern and simplified fee structure first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The suspension of import duties, quotas and trade defence measures on Ukrainian exports to the European Union – known as the Autonomous Trade Measures (ATMs) – are in place for another year. This strong testament to the EU’s unwavering support for Ukraine will help alleviate the difficult situation faced by Ukrainian producers and exporters because of Russia’s unprovoked and unjustified military aggression.
The EU is phasing out by 15 September 2023 the exceptional and temporary preventive measures adopted on 2 May 2023 on imports of wheat, maize, rapeseed and sunflower seed from Ukraine under the exceptional safeguard of the Autonomous Trade Measures Regulation. The scope of these measures is further reduced from 17 to 6 tariff lines for the 4 products covered. These temporary and targeted measures were adopted due to logistical bottlenecks concerning these products in Bulgaria, Hungary, Poland, Romania and Slovakia, and on the condition that member states do not maintain any restrictive measures. The phase out will allow for significant improvements to be made to the Solidarity Lanes and to address challenges to get Ukrainian grain out of the country for this harvest.
These measures continue to be necessary for a limited period of time given the exceptional circumstances of serious logistical bottlenecks and limited grain storage capacity ahead of the harvest season experienced in five Member States. As agreed, a Joint Coordination Platform has been set up to coordinate the efforts of the Commission, Bulgaria, Hungary, Poland, Romania and Slovakia, as well as Ukraine to improve the flow of trade between the Union and Ukraine, including transit of agricultural products along corridors. Executive Vice-President Valdis Dombrovskis is leading this process at political level. A first kick-off meeting of this coordination platform took place at technical level on 2 June.
The improvement of Solidarity Lanes will be, therefore, monitored by this export facilitation platform.
In case transit of Ukrainian goods is impeded by unduly burdensome requirements in one or several of the five Member States, the Commission will reassess whether the substantive conditions for imposing these preventive measures remain.
These exceptional and temporary measures fully respect the EU’s strong commitment to support Ukraine and preserve its capabilities to export its grains which are critical to feed the world and keep food prices down, in the face of the challenges posed by the unprovoked Russian aggression against Ukraine and its civilians.
Background
In force since 4 June 2022, the ATMs to liberalise trade with Ukraine have had a positive effect on Ukraine’s trade to the EU. Together with the Solidarity Lanes, the ATMs have ensured that trade flows from Ukraine to the EU have been preserved in 2022 despite the disruptions caused by the war and against the general trend of a strong decrease of Ukraine’s trade overall.
Unilateral and temporary in nature, the ATMs significantly broaden the scope of tariff liberalisation under the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA) by suspending all outstanding duties and quotas, as well as duties on anti-dumping and safeguard measures on Ukrainian imports in Ukraine’s hour of need.
The exceptional and temporary preventive measures on imports of a limited number of products from Ukraine entered into force on 2 May 2023 and were set to last until 5 June 2023.
The measures concern only four agricultural products – wheat, maize, rapeseed and sunflower seed – originating in Ukraine. They exceptional measures are more targeted in terms of scope and will also not apply to sowing seeds. During this period, these products can continue to be released for free circulation in all the Member States of the European Union other than Bulgaria, Hungary, Poland, Romania and Slovakia. The products can continue to circulate in or transit via these five Member States by means of a common customs transit procedure or go to a country or territory outside the EU.
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The Council today took a decisive step towards a modernisation of the EU’s rulebook for asylum and migration. It agreed on a negotiating position on the asylum procedure regulation and on the asylum and migration management regulation. This position will form the basis of negotiations by the Council presidency with the European Parliament.

No member state can deal with the challenges of migration alone. Frontline countries need our solidarity. And all member states must be able to rely on the responsible adherence to the agreed rule. I am very glad that on this basis we agreed on our negotiating position.
Maria Malmer Stenergard, Swedish minister for migration

Streamlining of asylum procedure
The asylum procedure regulation (APR) establishes a common procedure across the EU that member states need to follow when people seek international protection. It streamlines the procedural arrangements (e.g. the duration of the procedure) and sets standards for the rights of the asylum seeker (e.g. being provided with the service of an interpreter or having the right to legal assistance and representation).
The regulation also aims to prevent abuse of the system by setting out clear obligations for applicants to cooperate with the authorities throughout the procedure.
Border procedures
The APR also introduces mandatory border procedures, with the purpose to quickly assess at the EU’s external borders whether applications are unfounded or inadmissible. Persons subject to the asylum border procedure are not authorised to enter the member state’s territory.
The border procedure would apply when an asylum seeker makes an application at an external border crossing point, following apprehension in connection with an illegal border crossing and following disembarkation after a search and rescue operation. The procedure is mandatory for member states if the applicant is a danger to national security or public order, he/she has misled the authorities with false information or by withholding information and if the applicant has a nationality with a recognition rate below 20%.
The total duration of the asylum and return border procedure should be not more than 6 months.
Adequate capacity
In order to carry out border procedures, member states need to establish an adequate capacity, in terms of reception and human resources, required to examine at any given moment an identified number of applications and to enforce return decisions.
At EU level this adequate capacity is 30 000. The adequate capacity of each member state will be established on the basis of a formula which takes account of the number of irregular border crossings and refusals of entry over a three-year period.
Modification of Dublin rules
The asylum and migration management regulation (AMMR) should replace, once agreed, the current Dublin regulation. Dublin sets out rules determining which member state is responsible for the examination of an asylum application. The AMMR will streamline these rules and shorten time limits. For example, the current complex take back procedure aimed at transferring an applicant back to the member state responsible for his or her application will be replaced by a simple take back notification
New solidarity mechanism
To balance the current system whereby a few member states are responsible for the vast majority of asylum applications, a new solidarity mechanism is being proposed that is simple, predictable and workable. The new rules combine mandatory solidarity with flexibility for member states as regards the choice of the individual contributions. These contributions include relocation, financial contributions or alternative solidarity measures such as deployment of personnel or measures focusing on capacity building. Member states have full discretion as to the type of solidarity they contribute. No member state will ever be obliged to carry out relocations.
There will be a minimum annual number for relocations from member states where most persons enter the EU to member states less exposed to such arrivals. This number is set at 30 000, while the minimum annual number for financial contributions will be fixed at €20 000 per relocation. These figures can be increased where necessary and situations where no need for solidarity is foreseen in a given year will also be taken into account.
In order to compensate for a possibly insufficient number of pledged relocations, responsibility offsets will be available as a second-level solidarity measure, in favour of the member states benefitting from solidarity. This will mean that the contributing member state will take responsibility for the examination of an asylum claim by persons who would under normal circumstances be subject to a transfer to the member state responsible (benefitting member state). This scheme will become mandatory if relocation pledges fall short of 60% of total needs identified by the Council for the given year or do not reach the number set in the regulation (30 000).
Preventing abuse and secondary movements
The AMMR also contains measures aimed at preventing abuse by the asylum seeker and avoiding secondary movements (when a migrant moves from the country in which they first arrived to seek protection or permanent resettlement elsewhere). The regulation for instance sets obligations for asylum seekers to apply in the member states of first entry or legal stay. It discourages secondary movements by limiting the possibilities for the cessation or shift of responsibility between member states and thus reduces the possibilities for the applicant to chose the member state where they submit their claim.
While the new regulation should preserve the main rules on determination of responsibility, the agreed measures include modified time limits for its duration:

the member state of first entry will be responsible for the asylum application for a duration of two years
when a country wants to transfer a person to the member state which is actually responsible for the migrant and this person absconds (e.g. when the migrant goes into hiding to evade a transfer) responsibility will shift to the transferring member state after three years
if a member state rejects an applicant in the border procedure, its responsibility for that person will end after 15 months (in case of a renewed application)

Background and next steps
Both pieces of legislation on which the Council reached a general approach are part of the pact on migration and asylum which consists of a set of proposals to reform EU migration and asylum rules. This New Pact on Migration and Asylum from 23 September 2020 was accompanied by a number of legislative proposals. Among them, an asylum and migration management regulation and an amendment to the proposal from 2016 for an asylum procedure regulation.
Contact:

Johannes Kleis, Press officer | johannes.kleis@consilium.europa.eu

Compliments of the European Council, the Council of the European Union.The post Migration policy: EU Council reaches agreement on key asylum and migration laws first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Contribution by Luis de Guindos, Vice-President of the ECB, at Seminar on the Capital Requirements Regulation and Directive (CRR/CRD) | Madrid, 9 June 2023 |
CRR3/CRD6: key last step to fully leverage on the lessons learned from the global financial crisis
It is a great pleasure to take part in this seminar about the outstanding Basel III reforms in Europe.
These rules have been developed and agreed upon at international level by central banks and bank supervisors, in response to the lessons from the global financial crisis.
One important lesson has been that banks tend to downplay their risks using internal models. The core of the 2017 reforms – the output floor – ensures that a limit is established on how much banks can tweak their risk profile using their internal models. This is an essential achievement.
I will focus my remarks today on the fact that we need to protect this achievement, and we need to continue drawing lessons for our EU banking framework, including from the recent episode of bank stress.
Benefits of strong regulation and supervision
The recent episode of stress in the US and Swiss banking sectors reminded us of the importance of strong regulation and strong supervision. It was a wake-up call highlighting the merit of sticking to the agreed standards. There are many lessons that can be drawn from this episode. Let me focus on three in relation to finalising our banking framework, the CRR3 and CRD6.
First, we have seen that a strong regulatory framework eventually pays off. Euro area banks have been remarkably resilient in response to the pandemic, the Russian war and the recent episode of bank stress. Significant banks’ common equity tier one capital ratio stands at 15.3% on average, with liquidity well above regulatory minima. We have also seen improvements in the diversification of funding sources and bank profitability. At the same time, resilience of the euro area banking to the latest episode of stress should not lead to complacency.
Second, we have seen that weakening the regulatory framework can create systemic risks. Pockets of vulnerability can emerge easily, particularly where standards are not applied fully. And these vulnerabilities can quickly grow into broader financial stability risks. In this context, let me comment on the Liquidity Coverage Ratio, the LCR. Some attention has been paid to this element of the Basel framework and whether meeting the LCR would have helped the stressed banks. The LCR should not be considered a tool in isolation to measure and address liquidity and funding risks. To the contrary, the turbulence this spring shows that the Basel framework – which has regulatory and supervisory pillars – needs to be seen and be implemented, in its entirety. For example, in the ECB, the check of regulatory measures such as the LCR is complemented by additional supervisory liquidity risk monitoring.
A third and important lesson from the recent episode is that trust issues can develop and spread more quickly in the digital age. Bank runs can happen faster than in the past. This makes it even more important to have bank managers’ commitment to sound bank business models, because they are a precondition for trust. Bank management matters in establishing trust in business models. We need a tough rulebook which allows supervisors to check and react to bank management-related issues.
Priorities for the Banking Package
Coming to the topic of today, what should we focus on for finalising the EU banking package? Two key priorities emerge from the above learnings.
First, only strong rules will lead to strong banks. I am particularly concerned about those areas where the legislation proposals for the capital requirements regulation (CRR3) would deviate from Basel III – especially on the risk-weights for loans to unrated corporates. These deviations lower the impact of the output floor on banks’ required capital. In fact, on average, all proposed deviations together would more than halve the effect of the introduction of the output floor on banks’ required regulatory capital, and even lower the required regulatory capital for some banks compared to the status quo.
It is of particular concern that in some of the proposals these deviations are even suggested to be made permanent. Watering down the safeguards provided by agreed global standards now would send a detrimental message not only on the future resilience of EU banks, but also regarding the EU’s commitment to international agreements.
A similarly concerning issue is the intention by some trilogue parties to reintroduce prudential filters on the accounting of unrealised losses on government bonds. These have been in place in the EU until the end of 2022 on account of a systemic exemption during the pandemic crisis. They need to be strictly limited to exceptional crises times and now is not the time to reintroduce them.
As a second priority, I call on you to empower and trust prudential authorities. Only strong supervisors can implement strong supervision and exercise the required scrutiny. Here I am concerned about the reluctance to grant the ECB a stronger and more adequate role as a gatekeeper in ensuring that only suitable and experienced managers can take up top positions at banks, especially at large ones. Ensuring that managers are “fit and proper” for their job is key for sound and robust governance. The recent episode of bank stress has shown that culture matters and that banks need to be properly managed, as otherwise trust erodes.
In addition, I am concerned that all proposals still impose freezes on the macroprudential buffers of a bank when the output floor becomes binding. This is allegedly to avoid double-counting of risks. But here again, legislators should trust the macroprudential authorities to ensure that both buffers are calibrated appropriately. Macroprudential buffers cater for system- or sector-wide risk, while the output floor caters for bank-specific risk.
On a positive note, we welcome the inclusion of environmental, social and governance risks more explicitly in banking regulation, as this will grant supervisors more adequate tools to require banks to address these risks more effectively. We also welcome the new rules on third-country branches, which aim to avoid unregulated and unsupervised activities that could pose risks to financial stability in the EU.
Conclusion
Let me conclude. Finalising Basel III in EU legislation is crucial to keep our banks safe in an ever-changing macro-financial environment. We should do so faithfully, without deviations, to underpin our commitment to a resilient banking sector in Europe. I strongly welcome the intention of the Swedish and Spanish Presidencies to finalise CRR3 and CRD6 still this year, to ensure an entry into force on 1 January 2025. Targeting this date will also keep the EU aligned with the plans in other major global jurisdictions, so that we cross the finishing line together after this over ten-year endeavour to strengthen the global banking system. Only by upholding strong regulation and powerful supervision, will we ensure strong and stable banks in the EU.
Compliments of the European Central Bank.The post ECB Speech | Luis de Guindos: EU banking package first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Humanity needs nature to survive, and so do the economy and banks. The more species become extinct, the less diverse are the ecosystems on which we rely. This presents a growing financial risk that cannot be ignored, warns Frank Elderson, member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

A thriving nature provides many benefits that sustain human well-being and the global economy. Think of fertile soils, pollination, timber, fishing stocks, clean water and clean air. Unfortunately, intensive land use, climate change, pollution, overexploitation and other human pressures are rapidly degrading our natural resources.[1] This nature loss poses a serious risk to humanity as it threatens vital areas, such as the supply of food and medicines. Such threats are also existential for the economy and the financial system, as our economy cannot exist without nature.[2] Degradation of nature can impair production processes and consequently weaken the creditworthiness of many companies. Central banks and supervisors therefore need to understand how vulnerable the economy and the financial system are to this degradation. This is why the ECB has started looking at the dependence on nature of more than 4.2 million individual companies accounting for over €4.2 trillion in corporate loans.
We assessed how dependent companies and banks in the euro area are on the various benefits that humanity obtains from nature – experts call this concept ecosystem services.[3] Examples of such services are the products that we obtain from ecosystems such as food, drinking water, timber and minerals; protection against natural hazards; or carbon uptake and storage by vegetation. Our preliminary assessment showed that nearly 75 per cent of all bank loans in the euro area are to companies that are highly dependent on at least one ecosystem service. This means that these companies depend on ecosystem services to continue producing their goods or providing their services.[4] If nature degradation continues as now, these companies will suffer and banks’ credit portfolios will become riskier.
How nature-related risks lead to financial risks
There are two main channels via which nature affects companies and banks: physical risks and transition risks. Physical risks may be acute risks, such as increasingly severe natural disasters, or chronic risks, such as dwindling ecosystems. The effects could include falling crop yields owing to a decline in pollinating insects or the degradation of agricultural land. Scarcity of nature’s products could lead to supply side shocks for the pharmaceutical industry or to destinations becoming less attractive for tourism.
Nature loss can also amplify the transition risks of banks and their borrowers. Governments are increasing their efforts to protect the environment: the UN Convention on Biological Diversity set global targets in 2022, including the conservation of at least 30 per cent of the world’s lands, inland waters, coastal areas and oceans.[5] Such government measures could lead to changes in regulation and policy, limiting the exploitation of natural resources or banning certain products that trigger degradation. Technological innovation, new business models and changes in consumer or investor sentiment could also lead to transition risks and transition costs as companies are forced to adapt. Some older business models could disappear, while others might become too expensive and lose market share.
In a landmark study, De Nederlandsche Bank found that Dutch financial institutions alone have €510 billion in exposures to biodiversity risks[6]. In a similar study, the Banque de France found that 42 per cent of the value of securities portfolios held by French financial institutions consists of securities issued by companies dependent on at least one ecosystem service.[7]
Early last year, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) acknowledged that nature-related financial risk should be considered by central banks and supervisors in the fulfilment of their mandates.[8] They should recognise nature as a potential source of economic and financial risk and need to assess the degree to which financial systems are exposed to nature. To that end, the NGFS launched a task force on Biodiversity Loss and Nature-related Risks to explore, develop and harmonise nature-related considerations and efforts.
Economic and financial exposure to ecosystem services
The ECB is currently also studying how much the euro area economy and financial sector are exposed to risks related to ecosystem services. To assess the physical risk, we evaluated to what extent companies financed by euro area banks are dependent on the ecosystem services. The principal assumption behind this assessment is that greater dependence on ecosystem services is likely to result in greater exposure to ecosystem degradation. If nature degradation continues, economic activities dependent on ecosystem services will be affected by issues such as supply chain disruptions impacting prices and ultimately inflation. Moreover, reduced turnover could result in defaults and, as a consequence, to losses for any institutions lending to these companies. This could ultimately lead to financial stability concerns.
Our analysis shows that euro area companies are significantly exposed to several ecosystem services, both directly and via their supply chains.[9] The most important services are mass stabilisation and erosion control (i.e. vegetation cover protecting and stabilising terrestrial, coastal and marine ecosystems), surface and ground water supply, flood and storm protection, and carbon uptake and storage. Indirect dependency via supply chains is particularly significant for sectors such as agriculture, manufacturing and wholesale, and the retail trade.
In the euro area, approximately 72 per cent of companies (corresponding to around three million individual companies) are highly dependent on at least one ecosystem service. Severe losses of functionality in the relevant ecosystem would translate into critical economic problems for such companies. We also found that almost 75 per cent of bank loans to companies in the euro area are granted to companies with a high dependency on at least one ecosystem service (Chart 1). We observed only moderate differences between countries, as indirect supply chain dependencies (yellow bars in Chart 1) offset smaller direct dependencies (blue bars), especially in small and open economies.

Chart 1
Exposure of euro area banks’ loan portfolios to nature-related risks

Share of corporate loans from banks to companies with a high dependency score (greater than 0.7) for at least one ecosystem service. Loans are allocated to the country where the headquarter of the bank is located.

Sources: EXIOBASE, ENCORE, AnaCredit and ECB calculations.
Notes: Share of loans with a high dependency score (greater than 0.7) for at least one ecosystem service. A loan is labelled as highly dependent when the borrowing company has a sufficiently high direct dependency score (blue bar) or sufficiently high dependency when also taking into account possible supply chain linkages (yellow bar).

Conclusion
The preliminary results of our research show that Europe’s economy is highly dependent on ecosystem services and that these risks can spread to the financial system, potentially triggering instability. Therefore, we cannot ignore these risks. We will publish the detailed results of our analysis later this year. The findings will help to fill in blind spots and identify the next steps we must take. The aim is to address the cascading effects of nature degradation and climate change on the economy and financial stability. An integrated approach to climate and nature is critical because they are interconnected and amplify the effects of physical and transition risks. Given the high level of uncertainty regarding impacts, non-linearities, tipping points and irreversibility, gauging nature-related risks is complex. We cannot do this alone. Scientific input is needed to learn more about the transmission channels to our economies.
Our economy relies on nature. Thus, destroying nature means destroying the economy. Preventing the former is in the realm of elected governments as nature policy-makers. We as ECB have to take nature-related risks into account in the pursuit of our mandate.
Author:

Frank Elderson, Member of the Executive Board, ECB

Footnotes:
1. Díaz, S., Settele, J., Brondízio, E.S., Ngo, H.T., Guèze, M., Agard, J., Arneth, A., Balvanera, P., Brauman, K.A., Butchart, S.H.M., Chan, K.M.A., Garibaldi, L.A., Ichii, K., Liu, J., Subramanian, S.M., Midgley, G.F., Miloslavich, P., Molnár, Z., Obura, D., Pfaff, A., Polasky, S., Purvis, A., Razzaque, J., Reyers, B., Roy Chowdhury, R., Shin, Y.J., Visseren-Hamakers, I.J., Willis, K.J. and Zayas, C.N. (eds.) (2019), The global assessment report on biodiversity and ecosystem services – Summary for policymakers, Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) secretariat, Bonn, Germany.
2. Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review, HM Treasury, London.
3. For the assessment we mainly use the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) dataset from the Natural Capital Finance Alliance.
4. For a given ecosystem service, ENCORE performs a literature review and interviews experts to attribute a materiality score ranging from very low (0) to very high (1) in a five-step discrete classification. These scores consider how significant the loss of functionality in the production process would be if the ecosystem service were disrupted and how large the consequent financial loss would be. We define a borrower as highly dependent on an ecosystem service if its total materiality score is greater than 0.7. This means that the production process would be disrupted if the ecosystem service were degraded and such disruption is likely to directly affect the financial viability of the company.
5. Convention on Biological Diversity (2022), “Nations Adopt Four Goals, 23 Targets for 2030 In Landmark UN Biodiversity Agreement“, Official CBD Press Release, Montreal, 19 December.
6. De Nederlandsche Bank (2020), “Indebted to nature Exploring biodiversity risks for the Dutch financial sector”
7. Svartzman et al. (2021), “A ‘Silent Spring’ for the Financial System? Exploring Biodiversity-Related Financial Risks in France”, ECB Working Paper Series, No 826.
8. NGFS (2022), “NGFS acknowledges that nature-related risks could have significant macroeconomic and financial implications”, press release, 24 March. As of 29 March 2023, the NGFS membership comprised 125 members and 19 observers.
9. Direct dependency is obtained directly from ENCORE, while the upstream dependency is obtained using the EXIOBASE multi-regional input-output (MRIO) table to track financial flows between countries’ major economic sectors.The post ECB | The economy and banks need nature to survive first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Unemployment has declined since the peak of the pandemic in August 2020, hitting a record low this April. But while more people have jobs, they are working fewer hours on average. In this post for The ECB Blog we shed light on this dichotomy and why it matters for the overall strength of the labour market.

One could look at the euro area labour market and see a success story. After an initial drop at the beginning of the pandemic, employment recovered quickly. Between the fourth quarter of 2019 and the fourth quarter of 2022, the number of people in jobs increased by 2.3%, which is quite impressive given how severe the economic shock was. It means that about 3.6 million more people found work during that time. But that is just one part of the story – a very important one, but one that offers an incomplete picture. It is worth looking behind those headline numbers and analyse how many hours those people in jobs are actually working. In other words, whether they have a full-time job or are working fewer hours than they would actually like. To that end, we distinguish between average hours worked (the average number of hours per worker) and total hours worked (for all people in employment).
Over the period mentioned above, average hours worked declined by 1.6% (Chart 1, LHS). This represents a decline of around six hours per quarter and person since before the pandemic. The decline in average hours worked was particularly large at the onset of the pandemic, when government-supported job retention schemes facilitated the labour market adjustment as workers simply worked fewer hours (the so-called intensive margin). However, three years after the pandemic shock, average hours worked remain significantly subdued relative to employment, dampening the overall growth in total hours worked. But why?

Chart 1
Total hours and average hours worked

A comparison with the United States offers some interesting insights.[1] The two economies had similar adjustments in total hours at the onset of the pandemic (Chart 1). However, there is a stark difference in terms of average hours. While the adjustment in the euro area took place via the intensive margin (i.e. average hours worked) following the widespread use of government-supported job retention schemes[2], the changes in the US labour market did not affect average hours and occurred mostly via lay-offs (i.e. the extensive margin), resulting in much higher unemployment. This is also captured by the different developments in the unemployment rate in the euro area and the United States (see Chart 2). As the recovery took hold and fewer workers remained in job retention schemes, average hours worked in the euro area rebounded. Unlike the broadly stable path of average hours worked in the United States, however, they have stayed persistently below pre-crisis levels.
This naturally poses the question: what is driving the fall in average hours worked in the euro area at a time when many new jobs are created? Several factors stand out as potential explanations and are explored below.

Chart 2
Unemployment (and U7 for the euro area)

Construction and public services work fewer hours
The moderate recovery of hours worked compared to employment varies significantly by sector. The lion’s share of the increase in employment has been in the public[3] and construction sectors: 1.5 percentage points out of 2.3% (Chart 3 – blue bars). This is 65% of the overall increase, even though the two sectors only make up about 30% of total employment.[4] The public sector, in particular, saw a smaller increase in hours worked compared to the strong increase in employment. Chart 3 shows the contributions to total hours worked across all sectors of the euro area economy, including both employment and average hours. Total hours did not increase much compared to pre-pandemic levels in the largest market sectors, such as industry (excluding construction) and market services.

Chart 3
Sectoral contributions to total hours worked

(cumulative growth, Q4 2019-Q4 2022)

Source: ECB staff calculations based on Eurostat data.
Note: Yellow bars refer to the sectoral contribution of average hours worked (AHW) to total hours. Blue bars refer to the contribution of employment growth (EMP) to total hours. The green bar displays the overall contribution from agriculture. Industry-Service* aggregate includes all industries and services expect for construction and public sector.

Labour hoarding
Labour hoarding may have continued to play a role beyond the most acute phase of the pandemic, although for different reasons than during the lockdowns. Average hours recovered substantially in 2021 and early 2022. However, when the economy slowed in the second half of 2022 as a response to the energy price shock and uncertainties relating to the economic fallout from the Russian war of aggression in Ukraine, average hours worked stagnated while employment continued to increase at robust rates. Firms were reluctant to let workers go despite the economic headwinds, especially skilled employees who would be needed in future.[5] Labour hoarding may be rationalised by the current tightness in the labour market, with job vacancy rates at a record high and the unemployment rate at a record low. Around 29% of firms report labour as a factor limiting production, comparing to about 17% before the pandemic (Chart 4).

Chart 4
Labour shortages across sectors

(percentage of firms)

Source: European Commission, Business and Consumer Survey.
Note: Labour shortages are defined as the percentage of firms replying that labour is a factor limiting production.

More workers are on sick leave
While average hours worked increased between the second half of 2021 and 2022, unusually high levels of sick leave have had a significant impact in the euro area. Various national sources from the four largest euro area countries suggest that sick leave has increased by between 10-30% compared to 2021. Most cases are temporary sick leave, meaning that employees remain on the payroll of their employers. Data for Germany suggest that average annual working hours lost due to sick leave increased from 68 to 91 between 2021 and 2022. This is about 1.8% of average hours worked in 2022.[6] Figures from sources for France, Italy and Spain[7] show a similar trend, although to different extent. This has amplified the impact of labour supply constraints at a time of both strong labour demand and easing global supply-chain bottlenecks.
Secular drivers
Pandemic-related factors notwithstanding, average hours worked in the euro area have followed a long-term declining trend driven by demographic factors and persistent reallocation of employment across sectors.[8] Yearly average hours worked declined by 6.8% between 1995 and 2019, from 1,686 to 1,571. The strong increase in part-time employment accounts for 80% of the decline in average hours until 2014. The increased share of women employed accounts for 16% of the decline in weekly hours (women work an average of 32 hours while men average around 39).[9] While a large part of the decline may reflect workers’ preferences – e.g. an increase in leisure time – not all of it may be voluntary. Recent evidence from the ECB Consumer Expectations Survey shows that whereas about 20% of workers would like to work fewer hours, 35% of workers would like to work more. In addition, while the number of part-time workers who wished to work more hours has declined since 2019, there were still about five million at the end of 2022 of which about 28% were low-skilled workers and 43% were middle-skilled workers.
Conclusions
The euro area labour market has shown remarkable resilience during the post-pandemic recovery. This was particularly visible in terms of the record high of more than 165 million people in employment at the end of 2022. The rate of participation in the labour market for some important sociodemographic groups, like women and workers older than 55, still has some room to increase. Moreover, as the inflow of foreign workers continues in the coming years the labour supply should keep on growing. And this will contribute decisively to the growth potential and the economic welfare of the euro area.
The subdued path of average hours worked, however, is dampening the vibrant recovery in headline employment figures and, possibly, adding to current labour scarcity concerns held by many firms. Some of the factors for this are likely to dissipate as the economy normalises following the recent sequence of adverse supply shocks and as current sectoral supply-demand imbalances ease. Hoarding labour may become less attractive for firms faced by rising labour and financial costs, leading to a normalisation of average hours worked. The recent increase in sick leave may revert[10] although it is still too early to say for sure. Other factors like the lower level of average hours worked in the public sector, however, may remain. In any case, the large number of people who wish to work more hours calls for an in-depth revision of potential obstacles in the institutional frameworks of euro area labour markets, which may be hindering individual and social benefits.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
Authors:

Oscar Arce
Agostino Consolo
António Dias da Silva
Matthias Mohr

Compliments of the European Central Bank.
Footnotes:
1. See Box 1 “Comparing labour market developments in the euro area and the United States and their impact on wages” in article “Wage developments and their determinants since the start of the pandemic“, ECB Economic Bulletin, Issue 8/2022.
2. Differently from the Global Financial Crisis, these schemes were widely used across all euro area countries, helping employed workers to keep their employment status even if they worked zero hours.
3. We consider public employment to be all employment in activity sectors O to Q according to the classification used in Eurostat’s EU Labour Force Survey, namely public administration, defence, education, human health and social work activities.
4. Public and construction sectors account for about 25% and 6% of employment, respectively. See “The role of public employment during the COVID-19 crisis”, ECB Economic Bulletin Box, Issue 6/2022.
5. See “Main findings from the ECB’s recent contacts with non-financial companies“, ECB Economic Bulletin, Issue 1/2023.
6. German Institute of Employment Research (IAB).
7. Information from national social security agencies (INSEE for France, INPS for Italy and Seguridad Social for Spain). In France, the number of employees with at least one day of sick leave is reported to have increased by about 11% from 2021 to 2022. The total number of sick leave days in Italy increased by 34% in 2022 compared to the previous year. Information for sick leave in Spain points to a 30% increase in average monthly sick leave per employee in 2022 compared to 2021.
8. See “Hours worked in the euro area”, ECB Economic Bulletin, Issue 6/2021.
9. Eurostat Labour Force Survey data show that between 2002Q2 and 2013Q2 the share of part-time hours increased from 16% to 22%. Since then the share of part-time employment has stabilised, and even decline during the pandemic, meaning that the fall in weekly hours worked comes from full-time employment. The share of women in employment (aged 15-64) increased from 42.7% in 2002Q2 to 46.1% in 2013Q2 and 46.7% in 2022Q2.
10. Regarding the cyclical pattern of sick leave see e.g. Pichler, S. (2015), “Sickness Absence, Moral Hazard, and the Business Cycle”. Health Economics, 24, 692–710.The post ECB | More jobs but fewer working hours first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Luis de Guindos, Vice-President of the ECB, at the Annual Joint Conference of the European Commission and the European Central Bank on European Financial Integration | Brussels, 7 June 2023 |
It is a great pleasure to be participating in this year’s joint conference on financial integration. This event offers an excellent opportunity to reflect on key developments in the financial sector over the past year and to reassess priorities for advancing the integration, development and safety of the financial system.
Recent developments and the euro area banking sector
In recent months, bank failures in the United States and Switzerland have affected financial markets worldwide. This “real-life stress test” has provided valuable insights and lessons for the euro area banking sector and for our regulatory and supervisory framework.
The European banking sector has proven resilient. And the enhanced regulatory and supervisory framework put in place following the great financial crisis has proven its worth. But it is still incomplete – the Basel III agreement still needs to be transposed into EU banking regulation in a full and timely manner. We cannot be complacent.
During the recent bank failures, deposits were withdrawn much faster than during the great financial crisis. Silicon Valley Bank lost more than USD 40 billion – almost 30% of its deposits – in a single day. The extraordinary speed of deposit withdrawals was driven by the widespread use of online banking and the rapid dissemination of news via social media and was compounded by the highly concentrated customer base.[1] In this ever-faster digital world, banks, supervisors, central banks and legislators need to review the tools for safeguarding liquidity conditions and financial stability.
The turbulence seen in financial markets this spring is a timely reminder of the benefits of strong regulation and supervision. While adequate regulatory standards are the first line of defence against bank failures, they must be supported by a second line of defence in the form of steady, powerful and agile supervision.
Harmonised and effective supervision and an enhanced resolution framework
ECB Banking Supervision has successfully developed and promoted harmonised supervisory practices. It started to closely monitor risks related to rising interest rates when the first signs of inflationary pressures emerged, long before the bank failures in the United States. The European Commission[2] and the European Court of Auditors[3] recently confirmed that the ECB has established itself as an effective and mature supervisory authority, and the ECB has already started to implement their recommendations.
The EU has made considerable progress in crisis management by establishing a robust framework for dealing with banks in financial difficulties. While they are not a direct response to the recent turmoil, we strongly welcome the European Commission’s proposed changes to the crisis management and deposit insurance framework. In particular, we support expanding the scope of the resolution framework to ensure that the failure of small and medium-sized banks can be addressed in a more effective and harmonised way. At the same time, ensuring adequate resolution funding is critical to make resolution feasible for smaller banks. This includes using deposit guarantee schemes to help unlock access to the Single Resolution Fund and introducing a single-tier depositor preference. The proposals form a coherent package which must be preserved in its entirety. We call on the co-legislators to adopt it swiftly, preferably during the current institutional cycle.
The events of this spring have demonstrated the need for effective and agile crisis management frameworks for banks of all sizes. To complete the crisis management toolkit for large banks in the EU, we also need to make progress in other areas, such as liquidity in resolution and a backstop to the Single Resolution Fund.
The missing third pillar of banking union
The large gap in our institutional framework is still the missing third pillar: the European deposit insurance scheme. As long as deposit insurance remains at the national level, the sovereign-bank nexus will continue to be a source of fragmentation in the banking union, as the level of confidence in the safety of bank deposits may differ across Member States. In a crisis, we run the risk of deposit outflows towards other Member States and non-banks, thereby exacerbating systemic liquidity stress. An incomplete banking union is a key vulnerability for the EU banking sector and hampers progress towards greater financial system integration.
Furthermore, as firms broaden their funding sources and diversify away from bank loans, there needs to be a greater focus on financing through marketable debt securities and equity instruments. This lies at the heart of the capital markets union (CMU) project.
Implications for the capital markets union
Completing the CMU is essential for three reasons.
First, the CMU strengthens the resilience of the euro area economy through private risk-sharing.
Deep and integrated capital markets provide opportunities for effective risk-sharing. This is essential for financing the real economy and limiting fluctuations in economic activity. However, recent ECB analysis shows that, while euro area capital market integration has improved over the last 20 years, it remains rather modest.[4]
We must also consider the challenges posed by climate change in the coming years. Enhancing the risk-sharing potential of capital markets will help to further improve the ability of the EU financial system to sustain investment flows during climate-related shocks. This will bolster the EU’s overall resilience to increasingly frequent and intense extreme weather events, which typically hit regions asymmetrically.
Second, further developing EU capital markets boosts innovation, supports long-term growth and enables continued financing of the green transition.
This is of paramount importance as the EU navigates rapid technological change and is faced with an increasingly challenging geopolitical environment. The public sector cannot shoulder all the investment required for the green and digital transitions on its own.[5] Capital markets have a key role to play in allocating the private investment required and in complementing the financing provided by banks.
Equity financing – especially venture and growth capital – plays a central role in funding innovative firms. Given equity investors’ greater risk appetite, a larger share of equity financing may be needed to drive green innovation. ECB research suggests that an economy’s carbon footprint shrinks faster when a higher proportion of its funding comes from equity rather than debt financing.[6]
The EU still lags behind its global peers when it comes to developing venture capital markets. Although it has grown in recent years, EU venture capital relative to GDP is still only a fifth of that of the United States. Public investment at the European level can play an important role in crowding in private investment, while coordinated public-private investment can play a crucial role in kick-starting innovation. Furthermore, the EU and its Member States should strengthen their support for initiatives aimed at providing financing to small and medium-sized enterprises or funding EU-based start-ups and scale-ups.
On the plus side, we are already seeing substantial growth in sustainable finance. Although sustainable finance products still only account for a small share of euro area capital markets[7], assets under management of environmental, social and governance funds have tripled since 2015 while the volume of outstanding green bonds has risen tenfold. Promisingly, green bonds are roughly twice as likely as other European bonds to be held cross-border[8], and investments in environmental, social and governance funds appear to be more stable than those in conventional funds.[9] This incipient evidence suggests that, with the right regulatory framework in place, scaling up green finance will be beneficial in supporting both the low-carbon transition and financial integration in the euro area.
Third, the capital markets union and the banking union are intrinsically linked. More integrated capital markets support cross-border banking activities, while more cross-border holdings would allow banks to diversify, making them more resilient. From issuance to underwriting, banks provide essential services for capital markets. Therefore, a more resilient and integrated banking system also supports the smooth functioning and further integration of capital markets.
Key legislative initiatives to advance capital markets integration
To move forward on the legislative front, we need to finalise the implementation of the Commission’s capital markets union action plan – without compromising on its ambition. This includes implementing proposals such as the consolidated tape, the targeted harmonisation of insolvency rules and the upcoming initiative on the withholding tax framework.
We welcome the recent statement made by the co-legislators in April, in which they committed to finalising CMU legislative initiatives during the current institutional cycle, and the recent agreement on the European Single Access Point. The ESAP will help to mobilise and allocate capital by making it easier for investors to identify suitable firms and projects to invest in. Likewise, the proposed targeted harmonisation of insolvency regimes should make it easier to reallocate resources from failing firms and provide more transparency for cross-border investors. Finally, a more efficient and harmonised withholding tax framework will reduce the burden and costs for investors and facilitate cross-border investment.
Beyond the current institutional cycle and the CMU action plan, EU legislators should also look at structural issues, such as improving the current architecture to enable more consistent and harmonised supervision of markets.
Conclusion
The euro area financial system recently passed a real-life stress test. At the same time, the events of this spring underlined the importance of making decisive progress on the European banking union and capital markets union projects. The financial market turbulence and contagion from the United States and Switzerland would have been far more muted had we been closer to our goals. Completing the banking and capital markets union projects will increase cross-border bank lending and enhance the dynamism of public and private equity markets. Both are key to enhancing integration and stability in the euro area financial system, and they will also ensure that the funding for the green and digital transitions is available to meet the challenges ahead.
Thank you for your attention.
Compliments of the European Central Bank.
Footnotes:
1. Rose, J. (2023), “Understanding the Speed and Size of Bank Runs in Historical Comparison”, Economic Synopses, No 12.
2. Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 (COM/2023/212 final).
3. European Court of Auditors (2023), “EU supervision of banks’ credit risk – The ECB stepped up its efforts but more is needed to increase assurance that credit risk is properly managed and covered”, Special Report, No 12/2023.
Born, A., Bremus, F., Kastelein, W., Lambert, C. and Martín Fuentes, N. (2022), “A deep dive into risk sharing through the capital channel in the euro area – inter- versus intra-regional risk sharing”, Financial Integration and Structure in the Euro Area, ECB, April.
4. The European Commission estimates that an additional €454 billion per year of investment (in 2021 prices) is needed on average from 2021 to 2030 for EU Member States to reach their climate objectives. See European Commission (2021), “Impact assessment report accompanying the Proposal for a Renewable Energy Directive II”, Staff Working Document, Brussels, July.
5. See De Haas, R. and Popov, A. (2019), “Finance and carbon emissions”, Working Paper Series, No 2318, ECB, September; and Popov, A. (2020), “Does financial structure affect the carbon footprint of the economy?”, Financial Integration and Structure in the Euro Area, ECB, March.
6. Assets under management of environmental, social and governance funds represent around 10% of the euro area investment fund sector, while the amount of outstanding green bonds constitutes around 3% of outstanding bonds.
7. Born, A., Giuzio, M., Lambert, C., Salakhova, D., Schölermann, H. and Tamburrini, F. (2021), “Towards a green capital markets union: developing sustainable, integrated and resilient European capital markets”, ECB Macroprudential Bulletin, Issue 15, October.
8. Capotă, L.-D., Giuzio, M., Kapadia, S. and Salakhova, D. (2022), “Are ethical and green investment funds more resilient?”, Working Paper Series, No 2747, November.The post Banking Union and Capital Markets Union: high time to move on first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.