Mr. Frank O'Dwyer:

The Irish Association of Investment Managers, IAIM, is pleased to have an opportunity to contribute to the discussion on proposals to build an EU-wide capital markets union. The IAIM is the representative body for institutional investors operating in Ireland.

Like my colleague, I should say that the association will be responding to the consultation, but our board has yet to finalise its position. The views I am expressing today are not settled policy and, indeed, some of the opinions may well be my own.

It is abundantly clear that dependence on bank financing in the EU is markedly higher than in the US where up to 75% of funding of the real economy is provided by the markets. It is interesting to note that up to two years ago, non-bank financing was generally referred to as shadow banking. It was a term that was quite pejorative and likely to inflame legislators and policy makers. It is really over the past 18 months or so that people have begun to call it what it is - markets-based financing.

A simple comparison, however, between the US and Europe can be misleading. The US has always been a single market, with one language, a relatively uniform legal system and, proportionately, a much greater number of very large institutional investors. Generally, across all regions of the US, investors have similar attitudes to risk.

In contrast, the EU has 28 legal systems, 24 languages and, more important, 28 different economies and differing national priorities. There are 11 currencies and very different attitudes across the Union towards savings and investments.

For example, in Germany there is a marked predisposition to avoid risky, complex or new investment-type products. The Commission's own supporting documentation shows that in the case of the US, 13.5% of the savings and investment assets of US citizens are in cash or deposits, while 31.2% of them are in shares and other equities. In Germany, almost 41% is in cash and under 10% is in shares or other equities. The diversity within Europe is evident from the fact that in Sweden, for example, only 16% of investments are in cash, with 33% in equities. There is therefore a wide disparity across Europe.

Despite all of this complexity, the association welcomes the project. The EU needs to eliminate barriers which impede the movement of capital both within the Union and between the EU and the rest of the world.

The Green Paper is underpinned by a desire to see greater flows of capital markets funding into the SME sector. As the debate unfolds, I suggest that a fundamental starting point is the adoption of some standardised definition of what an SME is. The reality is that a small-sized enterprise in Germany would be a large business in Ireland, Latvia or a number of other EU member states.

In Germany, a company with a market capitalisation of €200 million is considered an SME, although that is larger than some companies listed on the Irish stock market. For policy makers and legislators, it is important to have a common understanding of what is the target group of businesses, the target sector, of the real economy that this initiative is meant to address.

The Green Paper does, even if indirectly, acknowledge this issue because it identifies a range of measures which are necessary to build a capital markets union. In some of the larger economies, all of the proposed measures are likely to have some merit. However, in smaller economies such as Ireland's, some of the proposals will have much more relevance than others. For example, I do not believe that relaxing the Prospectus Directive requirements would have a meaningful benefit for Irish SMEs as a whole. Nor do I believe that initiatives to facilitate mini-bond markets or bond markets specifically aimed at SME issuers, would be of significant benefit to Irish SMEs. I also believe that some innovative thinking may be needed for smaller member states, such as Ireland, to maximise the benefits which would emerge from a capital markets union.

It would be remiss of me not to refer in these opening remarks to what I see as the greatest challenge to the success of this project. Legislators will have to address the balance of regulation. The Green Paper and supporting working papers acknowledge that the financing of SMEs and infrastructure represents long-term, illiquid investments with greater risk characteristics. However, the largest sources of investment funds, the owners of funds, in the EU are insurance companies with assets of approximately €8 trillion and pension funds with assets of approximately €4 trillion. Both of these owners of funds are currently heavily regulated. In both cases, current and impending regulatory changes penalise, in one fashion or another, investment in long-term illiquid assets.

Having said that, in no way do I wish to narrow this debate to regulatory issues or to question the need for prudent regulation of pension funds or insurance companies. However, if we are to encourage investment in SMEs and infrastructure, then legislators and policy makers will have to engage in this debate. The process simply cannot work unless that debate is addressed.

Institutional investors are keen to have new asset classes in which to invest, including loan origination funds and other real economy-friendly products. We welcome Commissioner Hill’s commitment to engage with providers of investment funds as the CMU project progresses.