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1) Do you agree with the analysis out above regarding the
supply and characteristics of long term financing?
1.b) Generally speaking, the introductory part of the green paper presents and
defines long – term financing in a satisfactory manner. Nevertheless, terms such
as economic and social infrastructures should have been defined with more
accuracy in order to provide the reader with a more tangible and concrete
understanding of what falls under those definitions. Furthermore, short – lived
capital goods such as computers, mobile phones or vehicles are becoming far
more important to companies’ growth than the traditional long term – lived
capital goods. The reason the second category will, in all likelihood, overtakes
the second one lies in the fact that computers, mobile phones and short – lived
technology based capital goods are re – shaping the market. Specifically,
economic and social infrastructures need a lot of time before being implemented
because the financing of such activities is often in the hands of governments or
local authorities which are far from being time efficient entities. The education
and innovation industries have been irremediably re – configured by computers
and mobile phones or technology in general, in fact, many universities or high
education providers have been forced to offer web – based courses in order to
address the increased demand for online knowledge. On the other hand, the car
industry will probably see an irreversible decline since practices such as car
sharing are becoming a lot more popular amongst individuals (particularly those
below 35 years old) who have no longer access to stable jobs or decent salaries.
It is important to point out that, given the current economic conditions, cars
should not be considered short – lived goods anymore. If we consider that
people in the 28 – 35 age interval will soon become the engine of the actual
economy is not difficult to figure out that their precarious conditions will
remarkably affect the car industry. An article of the Guardian newspaper dated
18th of June 2013 reports the following: “The slump in European car sales has
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reached a fresh nadir with the worst figures for May in 20 years, eroding
manufacturers' faint hopes of a recovery after more than five years of decline.
The European Automobile Manufacturers' Association said demand for new
cars in the European Union was down 5.9% on the same month last year. Just
over a million cars were registered in the lowest total since 1993 – a blow to the
industry after a slight, unexpected upturn in April.
Amid negative economic growth across the Euro–zone, France, Germany and
Italy all showed big declines in sales, with only the UK among the largest
national markets bucking that trend. British car sales rose 11% in May.
Car manufacturers have been struggling with ever more consumers unwilling or
unable to afford new vehicles as unemployment rises. Several manufacturers
have announced factory closures or deferred launching new models”. The next
chart (source: Automotive News) displays fairly well the worldwide scenario
for the car industry:
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The housing market is definitely not in better shape so even the construction
industry is suffering from the tight economic conditions. House sharing is
becoming the most popular choice for many individuals because difficulties in
obtaining mortgages are forcing many people and families to adopt alternative
lifestyle options. The next chart (source: Knight Frank Residential Research)
shows the trend in the housing industry worldwide:
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The 12 month change is the most important column to examine because it
quantifies the long term trend. It is easy to notice that, if we exclude London
with +8.1% and Monaco (+12.2%), home prices in the largest European cities
have been all declining in 2012: Zurich (-2.5%), Vienna (-2.8%), Geneva (-
6.8%), Rome (-7.7%), Madrid (-13%), Paris (-13.6%). The current trend will
continue to depress house prices as long as the job market will remain weak.
Short term contracts, unpaid work and low – paying positions will continue to
keep low the demand for new houses in Europe. Specifically, an unstable
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contractual agreement with an employer or an insecure job position will
discourage individuals from purchasing new houses and will inevitably augment
the mortgage rejection rate.
2) Do you have a view on the most appropriate definition of
long-term financing?
2.b) Long term financing can be defined as the satisfaction of long – term
corporate liabilities via the acquisition of fixed streams of cash flows or equities
over a period of time not inferior to 5 years
3) Given the evolving nature of the banking sector, going
forward, what role do you see for banks in the channelling
of financing to long-term investments?
3.b) The role of banks in Europe will probably remain crucial in the next 3 to 5
years. However, in the last 3 – 4 years the banking sector failed to fulfil its
important social role: facilitating the circulation of cash amongst individuals
and businesses. Since this paragraph is primarily concentrated on commercial
banks the discussion field will be principally restricted to loans and mortgages.
Commercial banks have for years implemented a substantially “risk – free
arbitrage” between the interest rates paid for deposits and the interest rates
charged for loans and mortgages. The only risk commercial banks had is credit
risk or default risk, however, the credit risk exposure has been greatly reduced
by the fact that many insurance companies started to provide adequate insurance
policies against potential defaults of non – prime customers. The role the
banking sector will play in financing long – term investments will probably
change remarkably in the upcoming future. The ever – increasing rejection rate
and the tightening of loans/mortgages requirements are becoming a major
source of discontentment amongst micro and small business owners as well as
households. The next table (source: Eurostat) proves the point just made:
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The table report the success rate in obtaining bank loans by country (%). The
figures clearly show a net increase in unsuccessful claims in 2010 with respect
to the 2007. Recent data are not available yet but the quantification of short
term trends offered by the mainstream economic and financial data providers
display non – comforting figures. The unsuccessful applications rate in 2010 in
large economies was dangerously high: United Kingdom (20.8% against 5.6%
in 2007), Germany (8.2% against 6.7% in 2007), Spain (13.2% against 3% in
2007), France (7% against 2% in 2007) and Italy (4.9% against 1.2% in 2007).
This situation will likely push many business owners, households, entrepreneurs
and start–uppers to seek alternative forms of long term financing such as crowd
funding or peer–to–peer lending (often family, friends or acquaintances). These
alternative types of fund raising are already popular in the United States and
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they will keep increasing in popularity in Europe too. There are different
reasons which can augment the attractiveness of crowd funding solutions but
amongst the most cited motives, without a doubt, we have:
1) The face–to–face contact between cash lenders and loan/ mortgage
receivers
2) Lenders know perfectly well how their money are being used while in a
bank depositors are unaware of whom the bank is lending money to
3) The requirements for accessing funds can be more easily negotiated and
they can be shaped ad–hoc for a specific investment
4) There are many online platforms, social media groups, small financial
institutions or companies acting as intermediaries between demand and
offer but at a lower cost
Crowd funding or peer–to–peer funding solutions can have a significant impact
on the future of European financial scenario. In fact, these measures will be
largely adopted by freelancers, sole traders, micro or small business owners
which are, by far, the largest business segment in the whole Europe. The next
table (source: Eurostat) will help clarifying the aforementioned concept:
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The data refers to the 2009 but the figures are self – explanatory. Micro
enterprises constitute the 92.2% of the total businesses in Europe and if we add
micro and small businesses the percentage increases to 98.7% of the total. Now,
micro or small businesses will definitely encounter more difficulty in raising
finance in traditional ways (bank loans) due to shaky or low cash flows, to low
creditworthiness or to the fact that business is not well established yet in terms
of productive process. All these factors will increase the propensity for
alternative types of financing in the upcoming years.
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4) How could the role of national and multilateral
development banks best support the financing of long-term
investment? Is there scope for greater coordination between
these banks in the pursuit of EU policy goals? How could
financial instruments under the EU budget better support
the financing of long-term investment in sustainable
growth?
4.b) Development banks should respond more quickly to the needs of modern
economies. Nowadays, the traditional structure of the economic apparatus has
been completely reshaped and twisted by the crisis. Europe entered a new
economic and financial paradigm; hence, a more flexible approach is needed in
order to tackle the existing byzantine bureaucracy and the obsolete requirements
for project funding. Development banks should focus on smaller entities such as
freelancer, micro or small businesses because these realities are going to be the
only one who will be able to create stable growth. The only way for national or
multilateral development banks to support, in a sustainable manner, long – term
investment is to channel their resources towards small businesses and to finance
up to 55% of the total project costs. The recent crisis, which is still ongoing,
proved to be a hard wake – up call for many market players. The motto in the
upcoming years should be: let’s get back to basics. The largest companies
proved to be too slow when responding to market changes and sustainable
growth can only be achieved by allowing more competitions.
4.c) The interconnectivity amongst these banks can greatly help the EU towards
reaching its goals. A larger co–operation amongst development and national
banks could allow for the creation of preferential lending rates for virtuous
businesses (sustainable growth, low debt). A bigger collaboration could increase
the propensity to open start – ups and small businesses which would directly
benefit the job market by creating new vacancies.
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4.d) Financial instruments could benefit the European budget as long as 2 rules
will be closely observed and respected: responsible risk management and
portfolio diversification achieved via the combination of different maturities.
Specifically, European short or medium term liabilities could be
counterbalanced and financed via the bond market. Consequently, investing in
triple A ranked government debt securities could help European institutions to
offset medium term liabilities. In fact, the relatively safe nature of these
instruments would avoid the loss of the notional principal amount and the bearer
of the bond would benefit from the returns provided by the coupon.
Nevertheless, an appropriate combination of medium term maturing bonds (3 to
5 years) and long term expiring instruments would also manage to balance the
portfolio volatility. In fact, the low variance of the yields in long term bonds (10
or 30 years maturity) would compensate for the higher degree of fluctuations
experienced by medium term expiring bonds. Consequently, an appropriate yet
well managed investment over the entire yield curve would provide sufficient
financing for short and medium term liabilities promoting growth and
sustainable expansion.
5) Are there other public policy tools and frameworks that
can support the financing of long term investment?
5.b) There are numerous policies that can help the financing of long term
investments such as
1) Diminished bureaucracy
2) Fiscal credit for start – ups, free lancers or micro businesses,
3) Channelling funds for financing projects proposed by young entrepreneurs or
professionals
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4) Attractive interest rates for businesses loans or loans repayment spanned on
an increased period of time for virtuous businesses which manage to keep the
debt/equity ratio to a decent minimum
5) Low fiscal pressure for start – ups or businesses employing young graduates
These are only some of the measures that could be adopted in order to promote
sustainable growth. However, any policy which would increase the
entrepreneurial spirit amongst young Europeans would strongly benefit
economic expansion and prosperity in the long term.
6) To what extent and how can institutional investors play a
greater role in the changing landscape of long-term
financing?
6.b) Institutional investors such as insurance companies, mutual funds or
pension funds are obviously the largest market players when it comes to long
term financing. They, more than everybody else, provide liquidity on long term
expiring maturities since their liabilities are in the long term. However, given
the decreasing importance of state pensions and social security bodies, it is
reasonable to expect that their exposure to the back end of the yield curve will
increase in the next 5 to 7 years. In order to engage more institutional investors,
policies such as a low capital gain tax for longer holding periods could be
introduced or a fiscal credit measures for venture capitalists financing long –
term projects promoted by start – ups or young entrepreneurs/professionals
could be supported. Furthermore, more publicity could be given to green energy
investments channelling the attention of pension funds towards new energy
sources and “forcing” them to inject fresh capital towards industries which have
a large social impact and that would improve the living standards of European
cities. The recent data suggests an increased attention of pension funds and asset
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management companies towards non – liquid type of investments and private
equity ranging from high – tech companies to renewable energy, from housing
projects to biotechnologies so policies which give public exposure to small
businesses could be a great source to meet demand and supply.
7) How can prudential objectives and the desire to support
long-term financing best be balanced in the design and
implementation of the respective prudential rules for
insurers, reinsurers and pension funds, such as IORPs?
7.b) Probably the best way to preserve customers ‘investments as well as
ensuring solvency without harming long–term support is to increase risk
monitoring techniques and promote lower taxation rates on long term asset
holdings. The monitoring of the risk should be based more on statistical facts
than accounting procedures because portfolio volatility and yields variance are
more objective quantitative measures than accounting standards that can be
manipulated at any time. Besides, the expansive fiscal incentives would increase
the attention on the back of the yield curve which has less volatile yields. These
measures should decrease portfolio risk but they would boost the investment
predisposition in the long term.
8) What are the barriers to creating pooled investment
vehicles? Could platforms be developed at the EU level?
8.b) There already many pooled investment vehicles but the barriers have not
changed in the last years. The main problem is that pooled investment vehicles
are restricted to a limited amount of people given their expensive nature. The
credit crunch decreased the tendency to invest in financial markets or in other
forms of investment therefore some of the barriers could be eliminated by
promoting pooled investment vehicles on a more public scale. Also,
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deregulating and facilitating the creation of smaller yet competent asset
management firms would certainly facilitate the spreading of such vehicles.
8.c) Platforms at EU level could be developed. However, the change should
really happen at a private level. European institutions should monitor the
industry and deregulate it. Flexibility will be a key issue in the future and failure
to meet these requirements would probably result in both financial and human
capital losses
9) What other options and instruments could be considered
to enhance the capacity of banks and institutional investors
to channel long-term finance?
9) The channelling of long – term finance is useful as long as funds and
investments are redirected towards new sources of businesses or the
establishment of new companies. By this logic, banks, given the fact that they
are mere intermediaries, should promote new business opportunities to potential
investors (not necessarily institutional entities). The instruments could be of
diverse nature; however, the establishment of a start–up rating scale could be
introduced and proposed to interested parties. Performance – bounded
certificates with different maturities could be created by banks or financial
institutions and subsequently sold over to venture capitalists, institutional
investors, etc. This mechanism would create new business for the banking
sector but it would benefit entrepreneurs, start – uppers and professionals
because it would provide them with fresh capital to employ. Furthermore,
expansive fiscal measures for those investing in long term projects, businesses
or ideas are definitely the best tool to shift public’s attention towards long –
term financing.
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10) Are there any cumulative impacts of current and
planned prudential reforms on the level and cyclicality of
aggregate long-term investment and how significant are
they? How could any impact be best addressed?
10.b) The current scenario forces banks to increase their reserves which means
that less capital will be invested in short, medium or long term instruments or
projects. Furthermore, a potential augment of the fiscal pressure on market
instruments (stocks and derivatives including government bonds) could have a
depressive effect on long – term financing and market liquidity. The volatility
of government bond yields could remarkably change because a diminished
investment in long – term instruments would imply an increased variance in the
back end of the yield curve. Such phenomenon would alter the mortgage
market, whose interest rates are based on 10 and 30 years bond rates, and re –
financing operations. The private equity sector and small companies, whose
shares are far from being liquid, could be heavily influenced by the cumulative
effect of prudential reforms. In fact, a tightening of fiscal or prudential activities
will force banks, financial institutions, insurers and institutional investors to re –
direct their funds towards heavily traded stocks creating a great imbalance in
market equilibrium
10.c) Expansive fiscal measures are still the best way to increase the attention
towards the long term and alleviate the impact on the real economy.
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11) How could capital market financing of long-term
investment be improved in Europe?
11.b) Financial asset classes, such as equities or bonds, tend to respect a sort of
long term correlation. Government bond markets will always be used by market
players as a hedging tool to diversify risk in their portfolios. Hence, it is
absolutely normal to see negative correlation between bond markets and the so
called risky assets at least in the short term. This phenomenon explains why the
yields on triple A rated bonds, such as the 10 year German Bund, are fluctuating
around 1.5% and some auctions for shorter term debt securities issued on
German sovereign debt have registered negative rates. Nevertheless, regular
bond markets are still more attractive, despite the historically low returns, than
covered bonds or asset – backed securities. The popularity of covered bonds or
asset – backed securities is definitely diminishing amongst sophisticated
investors which are now looking at different ways to invest their funds. The
other source of financing is the equity market which is preferred by many
companies because it does not involve debt. However, SMEs still have to face
rather high costs for IPOs and long – term financing through equity capital
remains predominantly a practice adopted by well established and mature
businesses which account for less than 1% of the total number of businesses in
Europe. Capital market financing of long – term investment can be improved by
lowering the costs for IPOs and by introducing a lower fiscal pressure on those
companies which prefer equity financing to debt financing.
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12) How can capital markets help fill the equity gap in
Europe? What should change in the way market-based
intermediation operates to ensure that the financing can
better flow to long-term investments, better support the
financing of long-term investment in economically-,socially-
and environmentally-sustainable growth and ensuring
adequate protection for investors and consumers?
12.b) Capital markets have helped to fill the equity gap since the end of the
80s,however, these practices are much more established in the United States
than Europe where many companies prefer conducting business the “old way”.
The benefits of capital markets on the equity gap are obvious: more
transparency, injection of fresh capital into the business and flexibility.
12.c) Intermediation should happen at more affordable costs. Usually IPOs are
conducted by investment banks which charge very high fees and therefore only
large businesses can afford to adopt this source of financing. The establishment
of independent consultancy firms would definitely lower the costs and would
allow SMEs to get exposure to capital markets. The co – operation of European
stock exchanges could lead to the creation of a European equity index for
smaller businesses and less liquid stocks (like the Russell Index in the USA).
This equity index would increase the exposure of SMEs to the public and would
help to improve the capitalisation and liquidity of the European financial
markets which is still rather acerb in terms of development.
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13) What are the pros and cons of developing a more
harmonised framework for covered bonds? What elements
could compose this framework?
13.b) The benefits are a potential increased liquidity over the long term, a more
accurate assessment of companies’ liabilities in terms of accounting standards
and business book valuation a more harmonised and less fragmented
synchronization amongst European stock exchanges and capital markets in
general. The drawbacks are clearly connected to the risks that the issuer would
incur in case of credit event, credit risk in case of default of the counterparty
and, given by the large numbers of mortgages associated with each covered
bond, the miscalculation of the risk associated to the single instrument
13.c) Increased monitoring over covered bond issuing procedures, limited
number of mortgages assigned to each instrument, the mortgages underlying
instrument should strictly be assigned to prime ranked customers, risk
monitoring based on credit risk model valuation and volatility rather than
merely on accounting standards, the listing of covered bonds on the secondary
market or product publicity conducted by European stock exchanges to Over –
the – Counter clients
14) How could the securitisation market in the EU be
revived in order to achieve the right balance between
financial stability and the need to improve maturity
transformation by the financial system?
14.b) The securitisation market is probably exhausted in Europe. In the United
States, where financial markets are more mature and better capitalised than
European ones, many sophisticated investors and OTC clients are not interested
in such instruments anymore. Maturity in financial system cannot necessarily be
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achieved via securitising debt. Nevertheless, monitoring market credit risk using
appropriate valuation models and credit event techniques is certainly a more
accurate way to assess the volatility associated with the investment in
securitised debt. These measures could potentially restore confidence and
investors’ appetite towards this market
15) What are the merits of the various models for a specific
savings account available within the EU level? Could an EU
model be designed?
15.b) Household propensity to saving for the long – term it is almost entirely
dependent upon economic conditions. The next chart (source: Eurostat)
provides a quantification of household predisposition towards saving in the
largest European economies
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It is evident that the financial crises drastically altered the inclination of the
public to save for long – term projects (houses, university, etc) and it is
reasonable to assume that the role of savings accounts will be more important in
the future. Hence, more solutions could be proposed by banks and financial
institutions in order to foster long – term financing of public consumption and a
healthier approach to sustainable personal finance. The major benefits of a
saving account are the perceived long – term security of the funds and the low
taxation.
15.c) An EU model could be designed but, given the fact that the establishment
of European bonds seem to be farfetched at the moment, the only feasible
solution is the creation of European savings account whose long – term interest
rate depends upon the performance of triple A rated European sovereign debt
0
2
4
6
8
10
12
14
16
18
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Household Saving Rate
EU (27 countries)
Germany
Spain
France
Italy
Poland
United Kingdom
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securities. These types of saving accounts would certainly encourage
investments in the long term but they would also allow households and non –
sophisticated investors to access indirectly financial markets and to gain decent
profits. Furthermore, the invested capital would still be protected because, as
previously mentioned, the notional value would be redeemed at expiration.
Financial institutions could also charge customers a marginal fee, a premium, to
pay not higher than the 3% of the return generated by each coupon.
16) What type of CIT reforms could improve investment
conditions by removing distortions between debt and equity?
16.b) Equity capital is more subject to taxation so investment decisions are
clearly biased towards the issuing of debt securities. However, the leverage
created by these form of investments, if not correctly addressed, is not always
beneficial because it could increase the exposure to market risk and challenge
corporate cash flows in the medium to long term. On the other hand, a
softening of the fiscal pressure on equity capital could help SMEs to meet
medium term liabilities and remove any exogenous distortions
17) What considerations should be taken into account for
setting the right incentives at national level for long-term
saving? In particular, how should tax incentives be used to
encourage long-term saving in a balanced way?
17.b) There are numerous factors to take into account when setting policies at a
national level. Nevertheless, all incentives should be allocated in a way that
benefits the largest segment of companies in a country. The next table (source:
Eurostat) displays the number of enterprises in Europe and it classifies them for
size and growth rate:
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Even if the data set ends in the 2010 the number of “Other Enterprises”
indicates that most companies are neither big in terms of capitalisation nor
experiencing a growth rate higher than 20%. Consequently, most of the tax
release should be given, for a limited period of time, to SMEs because it would
allow them to allocate the extra capital and it would permit them to grow faster.
17.c) In order to encourage long – term investments without distorting the
allocation the fiscal incentives should be allocated using a logarithmic scale. By
using this approach the gradual increase in fiscal benefits would “gently” move
the attention towards longer term maturities without drastically altering the
market framework.
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18) Which types of corporate tax incentives are beneficial?
What measures could be used to deal with the risks of
arbitrage when exemptions/incentives are granted for
specific activities?
18.b) Corporate tax incentives should be allowed for small companies in the
first 1 – 2 years, for companies operating in socially relevant fields
(environment, health care or assistance, etc), for companies where a large
working capital is needed or for companies offering long – term contracts.
18.c) Arbitrage risk is very difficult to identify and even harder to eliminate.
However, a tight monitoring of the investment procedures employed by the
companies which are benefiting from the expansive fiscal measures would
certainly help.
19) Would deeper tax coordination in the EU support the
financing of long-term investment?
19.b) Yes. Deeper coordination within fiscal activities could certainly diminish
bureaucracy, lower costs and barriers
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20) To what extent do you consider that the use of fair value
accounting principles has led to short-termism in investor
behaviour? What alternatives or other ways to compensate
for such effects could be suggested?
20.b) Accounting principles have largely influenced companies’ performances
because many old style investors based their decisions on book valuation.
Accounting standards do not account for portfolio risk and volatility which are
factors that should always be considered while deciding how and where allocate
funds. Furthermore, the reduction in equity allocation and the augment of
investment towards government bond futures proves that volatility and portfolio
risk are crucial factors to account for. The next char plots the volatilities of
Eurostoxx futures, FTSE/MIB futures, DAX futures against German Bund
futures:
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Volatilities: European Equities vs German Bund
Bund Futures Eurostoxx Futures DAX Futures FTSE/MIB Futures
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The chart above reported clearly highlights the fact that equity markets (here we
used the German DAX and the Italian FTSE/MIB as proxies) have an average
volatility oscillating around the 15% – 20% interval whilst futures contracts on
10 years German sovereign debt fluctuates around the 5% – 6% range.
Volatility is risk and investors should know about it when investing in either
short or long term horizons.
20.c) “Short – Termism” in investment decision and performances is a typical
case of principal – agent problem. The management (executives, board of
directors, etc) are incentivised to boost performance in the short term because
their bonuses are tied to quarterly results while investors prefer long term and
stable performances. There are numerous studies in the field of corporate
governance which are trying to address this issue but bonding executives’
salaries and bonuses to stock LEAPS options with biennial or triennial maturity
could probably force a change towards the “Long – Termism”.
21) What kind of incentives could help promote better long-
term shareholder engagement?
21.b) Expansive fiscal measure applied on dividends for investors who engage
in long – term investments could certainly be the way to go
22) How can the mandates and incentives given to asset
managers be developed to support long-term investment
strategies and relationships?
22.b) Asset managers have to control and limit portfolio risk while creating
added value for their customers. Hence, the only incentives that could
empirically be effective are more attractive interest rates for 10, 20 or 30 years
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government bonds, a further decrease in long term yields which could help
stabilise even more portfolio risk or expansive fiscal measures for institutional
investors engaging significant amount of capital in long – term maturities
23) Is there a need to revisit the definition of fiduciary duty
in the context of long-term financing?
23.b) This is a measure of secondary importance.
24) To what extent can increased integration of financial
and non-financial information help provide a clearer
overview of a company’s long-term performance, and
contribute to better investment decision-making?
24.b) Financial information should not be limited to accounting figures but
portfolio volatility and correlation should be included in the information
publicly disclosed by asset managers. Furthermore, credit rating or benchmarks,
given the actual market volatility, should be based on annual performance. In
fact, any credit rating or benchmark based upon less than 9 months data
responds to an obsolete market paradigm. On the other hand, non – financial
information can benefit companies or businesses operating outside the financial
arena (particularly if the aforementioned businesses operate in social or
environmental fields)
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25) Is there a need to develop specific long-term
benchmarks?
25.b) Yes. Long – term benchmarks would create a minimum target to achieve
for asset managers but at the same time they would provide investors with a
quantitative standard or scale against which they can contrast real life figures.
The creation of long – term benchmarks would help investors in understanding
financial figures or companies’ performances allowing them to make better
informed decisions
26) What further steps could be envisaged, in terms of EU
regulation or other reforms, to facilitate SME access to
alternative sources of finance?
26.b) Other than applying expansive fiscal policies or reducing bureaucratic
measures for SMEs, the creation of a financial index tracking the performance
of the stock issued by small or less capitalized companies (the European
equivalent of the Russell Index in USA) would promote investment in these
entities. Crowd funding will become one of the most popular financing sources
for many SMEs in the upcoming years so regulating in a flexible and not
oppressive manner these aspects would definitely help their growth. The major
problem SMEs encounter when raising finance is public exposure. Therefore,
European institutions could create a way to promote or foster the virtuous SMEs
which distinguish themselves for high growth / low debt ratios or for their
engagement in social activities such as preservation of the environment or social
responsibility at a local level. The ways to promote these companies are
different but most of the work should involve the issuing of EU newsletters to
investors, the creation of an online portal where investors could find potential
companies and where interviews to the most virtuous managers, executives,
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employees could be reported and read. In other words, anything that would
provide SMEs with an increased public exposure would definitely help them
grow
27) How could securitisation instruments for SMEs be
designed? What are the best ways to use securitisation in
order to mobilise financial intermediaries' capital for
additional lending/investments to SMEs?
27.b) The re – designing should involve fiscal credit incentives for investors
purchasing instruments issued by SMEs and the securitised instruments should
have a lower number of underlying assets so that investors will feel more
comfortable when monitoring or managing their risk
27.c) The best way is to make securitisation a practice accessible to most SMEs.
Financial intermediaries will lend more and more often to SMEs if these
companies will use securitised instruments to increase liquidity. In fact, if SMEs
will start to see securitisation as a feasible channel for long – term finance they
will have to work with banks in order to issue the aforementioned instruments.
Consequently, banks will be more willing to lend extra cash to companies that
already provided them with a profit via customer’s commissions. Furthermore,
the selling of securitised instruments would allow SMEs to accumulate a higher
amount of capital so banks and financial institutions would probably charge a
lower rate for business loans because the proceeds coming from the selling of
asset – backed securities could be used as collateral and limit credit risk.
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28) Would there be merit in creating a fully separate and
distinct approach for SME markets? How and by whom
could a market be developed for SMEs, including for
securitised products specifically designed for SMEs’
financing needs?
28.b) Yes, the creation of an ad – hoc platform for SME markets would channel
the attention towards them and consequently increase the number of
investments
28.c) A platform for SMEs could be created by allowing a greater co –
operation between exchanges, financial brokers and banks under the supervision
of the EU. The European bodies should, at first, create the legal framework in
order to delineate the general rules which should be based on the principles
listed in the answer to the question number 27. The second step would involve
the intervention of major financial institutions which would assist the EU in
creating the platform and promote the product amongst customers and contacts
29) Would an EU regulatory framework help or hinder the
development of these alternative non-bank sources of
finance for SMEs? What reforms could help support their
continued growth?
29.b) An efficient regulatory framework for alternative non – bank sources is
necessary to protect customers and to advertise the existence of a SMEs market.
However, policy makers should not regulate heavily the sector and should not
introduce too many barriers because the majority of the SMEs have to be able to
access this market at affordable costs.
29.c) Lower fiscal pressure, decreased bureaucracy, flexible regulation for
SMEs
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30) In addition to the analysis and potential measures set out
in this Green Paper, what else could contribute to the long-
term financing of the European economy?
30.b) The most important measures and potential reforms have been extensively
discussed in the paper. However, increasing the exposure to financial education
as well as expanding public awareness towards the benefits of long – term
financing are important aspects to consider.