(The webinar recording is available online) Over a year into the pandemic and Europe is in danger of facing a new wave of restrictions. Despite Europe’s banking system performing resiliently in 2020 and public authorities providing unprecedented support to businesses, it is clear this support will eventually need to be rolled-back according to panellists at AFME’s and Business Europe’s webinar on Europe’s economic recovery. As Europe recovers from the pandemic actions will be needed to promote alternative sources of funding. On March 19, AFME and BusinessEurope held a webinar on Europe’s economic recovery. The call featured senior policymakers from the European Parliament, European Commission, European Central Bank, and the Ministry of Finance of Portugal. In his opening remarks,Markus Beyrer, Director General of BusinessEurope, highlighted the uncertainties and likely uneven progress towards the economic recovery. On the positive side, manufacturing has performed relatively strongly, with export demand from the US and China playing a positive role. Also, many businesses are now better prepared to face the lockdowns. However, Beyrer also noted that business confidence remains low, making it unlikely that business investments will pick up soon. In this context, viable businesses need to be protected and a too sharp withdrawal of support measures (e.g. the moratoria on debt or the guarantee measures) would be damaging. But of course, we cannot stay in “crisis mode” forever. Beyrer stressed the importance of the Recovery and Resilience Facility to boost investments and transform the EU economy. But private investment is also important and businesses need to have access to the finance they need. Beginning discussions,Isabel BenjumeaMEP spoke of the need to improve the European financial system, highlighting this could be facilitated by further integrating European financial markets and addressing low-levels of bank profitability and developing financial markets capacity. Crucially, Benjumea spoke of the need to learn lessons from the 2008 financial crisis and how the burden of financing the recovery should not solely fall on banks: a more diversified financial system is essential. To support the recovery, public intervention needs to be complemented by private investments and a complete Capital Markets Union, together with the completion of the Banking Union, can enable those investments. Michael Cole-Fontayn, Chair of the AFME Board, summarised the finding of AFME’s recent report on “Recapitalisation of EU businesses post Covid-19”, which reveal that many mid-size and SME corporates do not wish to give up control of their business but are willing to pay a premium not to dilute their voting rights, as well as are willing to distribute a share of profits to investors. Hybrid instruments are therefore likely to be well suited to address these needs. AFME recommends exploring the development of a new EU-wide hybrid instrument designed specifically for non-financial corporates and SMEs. He welcomed the recent French measures to support the provision of “equity loans” – a form of subordinated debt - to firms which were affected by the crisis but remain viable. Michael stressed the need to maintain momentum on the long term priorities like CMU and Banking Union. 1. Panel discussion ‘The performance of European Banking and Capital Markets During the Pandemic ‘-moderated by: James Watson, Director, Economics Department, BusinessEurope Speakers: - Edouard Fernandez-Bollo, Member of the Supervisory Board, European Central Bank (ECB) - Erik Fossing Nielsen, Global Chief Economist, UniCredit - Klaus Günter Deutsch, Head of Department Research, Industrial and Economic Policy, Federation of German Industries - Michael Lever, Managing Director, Head of Prudential Regulation, AFME Edouard Fernandez-Bollo, highlighted the following three aspects: firstly, the EU financial system has shown resilience (operationally and financially), even beyond what was expected. Banks’ solvency ratios will be stronger in 2021 than is 2020, despite very significant provisions for credit risk. This is also the result of the many support measures that public authorities, national and EU, have adopted since March 2020. Secondly, the support measures will need to be removed but carefully, and banks will need to anticipate and monitor the effect of this phasing out. Thirdly, the issue of low banks’ profitability remains as a structural vulnerability, which has been aggravated by this crisis. Banks will need to adapt their business models, increase revenues, reduce costs, to respond to this structural challenge and to concentrate on the sectors which will lead the recovery. Erik Nielsennoted that banks will remain central in the EU, as a shift towards more diversified capital markets will take time. He noted however that while it is true that banks are stronger and part of the solution, the main reason is the guarantees provided by the governments, and should these guarantees be withdrawn too quickly the impact on banks would be significant, which could lead to a credit squeeze. Erik insisted on the major issue of low banks’ profitability: for the past 10 years the European banking system has not been able to generate a ROE above its cost o capital. This limits banks’ ability to remain well capitalised. Reasons include the very low growth, the policy mix. On the need to reduce costs: while certainly important it can be the only solution (a 35% reduction would be needed to bring ROE to the average level, an unrealistic reduction); higher revenues are needed, but let’s not forget that they represent an implicit tightening of the monetary conditions. How to square this circle remains an open and difficult question. Erik noted the larger size of the fiscal stimulus in the US, a direction the EU might have to follow. Klaus Deutsch, highlighted the strong fiscal response of EU institutions and governments, which has protected companies from insolvency. Financing conditions for EU businesses have remained relatively good. These support measures have been designed on the assumption of a pandemic under control by Q2 this year; given that vaccination programs might actually require to be completed in Q3 or Q4, these measures need to be prolonged. Also sectors like leisure, travel, hospitality, which have a relatively large share in some countries, will need special attention, to avoid long-term repercussions. Klaus stressed the key role played by the ECB in providing liquidity to the system. He also cautioned about an implementation of the Basel standards which could lead to significantly higher capital requirements for banks, constraining their ability to lend. Klaus suggested the need for an EU framework for how to avoid insolvencies in businesses which, while viable, are particularly hit by the pandemic (e.g. travel / tourism sector). Michael Leverstressed the important role played by banks in this phase, with record levels of net lending to the economy and with the ability to absorb extensive moratoria and to facilitate high level of debt issuance in capital markets. Michael highlighted the uncertainties around the recovery and a trend toward tightening of credit conditions. In any case debt financing cannot be the only source of financing: innovative recapitalisation tools are also necessary. Michael noted that bank consolidation in Europe, which would require progress on Banking union, would help address banks’ low profitability. 2. The second panel discussed ‘The Road to The Recovery - Policies to Ensure Access to Finance and Well-Functioning Banking and Capital Markets’-moderated by Stefano Mazzocchi, Managing Director, Advocacy, AFME Speakers: - João Nuno Mendes, Secretary of State for Finance, Ministry of Finance, Portugal - Martin Merlin, Director, Bank, Insurance and Financial Crime, European Commission, DG FISMA - Véronique Ormezzano, Head of Group Prudential Affairs, BNP Paribas - Tarek Tranberg, Head of Public Affairs and Policy, European Association of Corporate Treasurers (EACT) The second panel focused on the necessary policies to ensure access to finance and well-functioning banking and capital markets. João Nuno Mendesshared optimism, emphasising the strong consensus between EU authorities on the need to implement exceptional measures to support Europe’s economic recovery. The recovery plans that will be adopted in the coming months will define structural, and not purely liquidity, measures. Also, the idea of new hybrid instruments to recapitalise EU businesses is a particularly important one. He highlighted how Europe’s recovery provides an opportunity to revitalise capital markets and act as a catalyst for entrepreneurship. Progressing on the Banking Union is also crucial and a roadmap will be presented by mid-2021. On Basel III, Joao said implementation should avoid possible impacts on the recovery. Martin Merlindistinguished policies between those that could be implemented in the short-term versus the long-term. In the short-term, new instruments such as hybrids - proposed inAFME and PwC’s report on Recapitalising EU corporates- could be looked to fill Europe’s immediate equity gap. Additional short-term measures also included effectively implementing new regulations such as Basel III and wisely calibrating prudential regulation so that we do not unnecessarily penalise banks’ ability to invest in the European economy (particularly equity investments). Insurance companies’ ability to invest in equities can also be strengthened in the context of Solvency II. Martin agreed that financial regulation needs to be calibrated carefully; however it is not “the only show in town” and we cannot overburden it with too many objectives in addition to financial stability. For long-term measures, progress on the Capital Markets Union project was identified as an important goal for this legislature. Martin also stressed the positive impact that keeping momentum on the long-term objectives can have in the short term, thanks to the signalling and confidence-building effects. Veronique Ormezzanowelcomed the bold steps undertaken by the EU institutions and member states, which have enabled banks to continue to support their clients and the economy. Veronique summarised the recent French scheme, which will guarantee (up to 30%) investments funds which would invest in such loans: banks will provide the loans to firms and will then transfer these loans to investments funds in which institutional investors will invest. In order to align all interests, banks will keep a minimum share of each loan (probably 10%). This measure will also apply to subordinated bonds, in order to mobilize private equity funds. Business can start reimbursing the debt after 4 years. Veronique also highlighted the need to consider the competitiveness of Europe’s financial sector when implementing new reforms. Particularly important will be the implementation of Basel III as well as the upcoming stress-tests. Sustainability objectives are also crucial, but appropriate transition arrangements need to be adopted. The importance of reviving securitisation markets in Europe to support growth was also stressed. Tarek Tranbergsummarised the many challenges corporates face in this environment, both in terms of short term “survival” and in terms of structural changes (e.g. shift to sustainable objectives). Corporates have managed the emergency phase thanks to their ability to access liquidity support from banks, with government support. This support should be maintained until there is a risk of prohibitively high financing costs. Recapitalisation instruments are essential to avoid excessive debt. In a CMU context easing some of the listing requirement for smaller companies would be important. However, bank lending will remain crucial and for corporates, it is important that Basel III implementation does not result in a reduced ability to access bank loans or risk hedging. Corporates are also worried about initiatives to standardise corporate debt markets.

On 24 February, policymakers and industry participants gathered to discuss pertinent issues surrounding Spain’s capital markets. Among the views expressed were those of keynote speaker, MEP Luis Garicano. Referencing statistics in the recent report byThe Bank of Spain, Garicano highlighted the risk of insolvency to small & medium-sized firms (SME) and its implications for the Spanish economy if left unaddressed, “We must act now to stop the solvency crisis before it takes over and is really difficult to deal with.” He emphasised the need for immediate action, which he broke down into three key pillars. Firstly, he proposed improvements to Spain’s insolvency framework for SMEs. He highlighted that the framework is not providing a suitable level of support to SMEs with future growth potential. He proposed steps to make the process more efficient and agile. The second pillar was to improve debt restructuring procedures by offering incentives for restructuring. He suggested involving the state in public restructurings and collaborating with banks in a manner where they have shared incentives. The third pillar proposed was the implementation of state aid. Here Garicano commended the recent steps made by the Spanish government and the announcement of an €11 billion direct aid package. Optimistic for 2021 Carlos San Basilio Pardo, Secretary General of the Treasury and International Financing, Spanish Ministry of Economy and Business Affairs, in a fireside chat also praised the work of governments and European authorities in facilitating positive financing conditions for companies affected by the pandemic. He noted a rapid Spanish economic recovery in the latter part of last year and held similar optimism for this year and how this would be supported by new measures aimed at guaranteeing the solvency of companies. Lastly, San Basilio highlighted the importance of reviewing Spain’s fiscal regulatory framework and making it easier to understand and navigate. The state of Spanish Securitisation The first panel of the day was on the topic of Spanish securitisation and how it had coped during the pandemic. Heike Hoehl, Executive Director, Syndicate, Santander CIB, noted how the recovery was better than expected given the severity of the impact on the market in the first few months of the pandemic. Timothy Cleary, Partner, Clifford Chance, echoed similar sentiments noting that after a large dip in the number of transactions in the initial months of the pandemic, from April and May he began to see a return in deal activity. Cleary also highlighted that he did not see a significant change in the structuring of deals (risk transfer deals) as a result of COVID. However, he did note that investors were avoiding exposure to sectors such as hotels and tourism, as well as loans that are in moratoria or have more recently been subject to moratoria as a result of COVID. María Turbica Manrique, Vice President, Senior Credit Officer, Moody's Investors Service, commented that she did not yet see evidence of significant deterioration in credit performance across asset classes, but cautioned that the real impact on unemployment and house prices was yet to be realised. Fernando González, Senior Adviser, European Central Bank (ECB), sharing insights from the banking supervision perspective, said he saw “a very strategic role” for significant risk transfer (SRT) transactions going forward. Proceedings concluded with polling where the majority of the audience estimated that Spanish securitisation issuance in 2021 would be about the same as in 2020.

For Europe to successfully fund its post-pandemic economic recovery, it will need to strike a delicate balance. This will be between achieving the necessary scale to accelerate Europe's corporate sector recovery while also adopting a tailored approach to funding through equity as well as existing and new hybrid instruments. This was one of the key takeaways from AFME’s webinar, ‘Sizing and Resolving COVID-19 European Corporate Recapitalisation – Equity and Hybrid Markets Solutions’, held on 26 January 2021. The event featured a panel discussion between policymakers and industry experts including Tatyana Panova Head of Unit for Capital Markets Union, DG FISMA, European Commission; Uli Grabenwarter, Deputy Director, Equity Investments, EIF; James Chew, Global Head, Regulatory Strategy, HSBC; Stefano Firpo, Senior Director, Intesa Sanpaolo. AFME & PwC’s report,Recapitalising EU businesses post COVID-19, was used as a platform for discussions. Tatyana Panova began proceedings by emphasising the importance of national, private and public sector collaboration and ensuring that crisis support is channelled to businesses. Tatyana said that re-equitisation is one of the priorities of the Capital Markets Union Action Plan and she welcomed AFME & PwC’s analysis that examines how equity finance can be promoted. She explained that even though support through a public-private fund could help businesses, the right balance would also need to be struck. This would be between achieving the necessary scale in the investment available while also mitigating the additional conditions attached. Panova acknowledged the potential benefits of hybrid instruments in supplying capital without as many conditions (e.g. requirements that diminish ownership control of a company). She mentioned that in encouraging greater use of the instruments industry should consider the impact of standardisation. She explained that in some cases 'straight jacketing' could reduce the benefits associated with hybrid instruments. Similarly, Uli Grabenwarter emphasised the need for measures implemented to be sophisticated and accommodate the needs of specific companies. Different sectors have been affected differently by the pandemic, and therefore may have different growth perspectives and different funding requirements. Speaking next, Stefano Firpo, touting the viability of hybrid instruments, stated that they were already a useful instrument in the market and greater standardisation would help reduce market fragmentation. Similar to Grabenwarter, he highlighted that equity needs in the market are also unequal, with certain companies and firms requiring significantly more than others. He stressed the need for an aggregation platform to help attract investment to smaller firms that might otherwise struggle to get funding. James Chew emphasised that the measures to support Europe’s economic recovery are not a one-year program and need to be viewed from a long-term perspective. He highlighted that one of the greatest investment needs was in funding innovation in Europe. Chew highlighted that industries have now changed due to the pandemic and will need to adapt. If firms are consumed by trying to stay afloat and are short on equity funding, they will be unable to innovate to boost their long-term growth prospects. The session concluded with all panellists agreeing that Europe’s post-pandemic recovery and sustainability agendas are intertwined and should not be considered separately. As businesses restructure their business models and recover from the pandemic, it will be expected to be a sustainable recovery too. Listen to the webinar in detail via our online recording. AFME Contacts: Patricia Gondim Interim Head of Media Relations [email protected] +44 (0)20 3828 2747

Less than 12 months now remain before the continuation of panel-based LIBOR can no longer be guaranteed. The UK authorities have stated that it is “in the interests of financial markets and their customers that the pool of contracts referencing LIBOR is shrunk to an irreducible core[1] ahead of LIBOR’s expected cessation, leaving behind only those contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended.”[2] Such contracts are commonly referred to as “tough legacy” transactions. AFME calls on all market participants to join us in actively transitioning as many transactions as possible to identify and reduce the stock of “tough legacy” securitisations to this “irreducible core” well in advance of the end of 2021. If not already done, we urge issuers and investors to contact each other via established channels (set out in transaction documentation) in order to identify and implement the required practical next steps for the bonds affected. AFME (and other trade associations) have been engaged in this subject for some time and stand ready to help facilitate cross-market discussions where required. While draft legislation has been laid before Parliament to assist in the resolution of “tough legacy” transactions, the UK authorities have made clear that “Parties who rely on regulatory action … will not have control over the economic terms of that action. Moreover, regulatory action may not be able to address all issues or be practicable in all circumstances …”.[3] The FCA has further pointed out that although it may be given the powers to facilitate a “synthetic” LIBOR to be developed and used, it will not be bound to use such powers. In view of the potential deterioration in liquidity in LIBOR-based instruments and other financial and non-financial risks associated with inaction, including the loss of control over economic terms, if there is any solution for such transactions that enables active transition to the relevant risk-free rate to be effected then AFME urges that that solution should be considered as a matter of urgency in line with the FCA’s expectation that market participants should effect a material reduction in the stock of outstanding LIBOR-based FRNs by the end of Q1 2021. AFME will continue to work with its members, other trade associations and all market participants to further this goal and we welcome engagement from the broadest set of stakeholders. AFME Contacts: Richard Hopkin Anna Bak [email protected] [email protected] +44 (0)20 3828 2698 +44 (0)20 3828 2673 [1] AFME emphasis. [2] Statement of H. M. Treasury, 23rd June 2020. [3] Ditto.

When the European Commission unveiled its Covid-19 capital markets recovery package in July 2020, a much welcomed measure was the proposal to extend the framework for simple, transparent and standardised (STS) securitisations to cover on-balance-sheet securitisations. On-balance-sheet securitisation can be a vital tool in the current economic environment. The mechanism is especially helpful in managing credit risk and capital requirements in relation to corporate and SME loans, which are both capital-intensive when held on balance sheet and difficult to securitise in the traditional securitisation markets. A well-designed framework can therefore make it easier to lend to new borrowers, including homeowners, consumers, SMEs and entrepreneurs, and help support Europe’s economic recovery. A new regulatory framework must always be prudentially sound and provide strong levels of investor protection. But it must also be economically viable and attractive for its targeted users; in this case, it must provide the necessary incentives for banks and investors to use this type of securitisation. Following the political agreement recently announced by EU legislators, has the right balance been achieved between these objectives? A better capital treatment, improved standards and integration of sustainability considerations In order to encourage the use of the STS label and increase bank lending, EU legislators have introduced preferential risk weights for the senior tranche of an on-balance-sheet securitisation which is retained by the originator. Subject to supervisory approval of the risk transfer, this frees up capital for the originator bank to continue making new loans to other borrowers. The new framework will also further increase transparency in relation to on-balance-sheet securitisation and, in time, will lead to greater standardisation in a way which conforms to what are seen as "best practice" standards. Greater standardisation will also make it easier for investors to compare transactions across different originators and jurisdictions. Another positive element in the legislation is the introduction of provisions to integrate sustainability into the wider securitisation framework. Standards will be developed to report on the sustainability of securitisation products and the European Banking Authority will draft a proposal for a dedicated framework for sustainable securitisation.An appropriate framework can do much to support the market for green securitisation, which is in early stages of development. Could some new requirements undermine the effectiveness of the framework? Extensive analysis of EU on-balance-sheet securitisation markets since 2008 shows that, even without the availability of the STS label, this portfolio management tool has been widely used by banks in many jurisdictions across the EU, and that these securitisations have experienced extremely low loss rates. In particular, there have been virtually no losses affecting the senior tranches of on-balance-sheet securitisations which are retained by the originator. A number of additional safeguards included will preserve and strengthen the prudent use of this mechanism. However, some provisions introduced by the legislators are likely to increase complexity and make the framework more expensive to use. One example of this is the requirement for the investor to have recourse to high-quality collateral to secure repayment of their investment. These requirements are more onerous than those generally used in existing on-balance-sheet securitisations, and will add cost and complexity to transactions. Another concern stems from the newly-introduced requirement to risk weight synthetic excess spread expected to be made available for future periods, particularly as this applies to all on-balance-sheet securitisations, regardless of whether they achieve the STS label. These requirements risk undermining the economic viability of future transactions, including those involving the European Investment Fund when it acts as Protection Seller which have recently provided vital support to thousands of SMEs across the EU. Much will depend on how the EBA approaches the implementation of this requirement through the development of technical standards in this area. It would indeed be unfortunate if these requirements lead to a more limited use of the new STS label or make many on-balance-sheet securitisations transactions uneconomic at a time when they are most needed. In conclusion, EU legislators should be commended for fast-tracking this initiative intended to support bank lending to European businesses and households through very difficult times. It is, however, too early to draw conclusions on how effective the framework will be in meeting these objectives. The design of the technical standards will be an important consideration. The success of the framework will ultimately depend on whether a good balance has been achieved between the necessary regulatory safeguards and incentives for market participants to make use of, and invest in on-balance-sheet securitisations.

(This article was originally published in The International Banker on 1 December. ByAdam Farkas, Chief Executive Officer, Association for Financial Markets in Europe (AFME) In October, AFME, in partnership with 10 other organisations, published areport1that provides context and evidence on how Europe’s capital markets performed in the first half of 2020. Statistics used in this piece regularly reference this document. As we reach the tail-end of 2020, it is important to reflect not only on how Europe’s economy has coped during an unprecedented period but also how financial markets have evolved. At the beginning of the year, the European Commission’s (EC’s) overarching goal was to produce policies that supported growth, competitiveness and transition to a low-carbon economy, with a particular focus on helping small businesses. During the COVID-19 crisis, these social priorities have become only more pronounced and so, too, has the role of Europe’s capital markets. Since its inception, the European Union (EU) has aspired to create a single market for capital, but the road to achieving this goal is still a long one. Progress has been slow in achieving one of the core objectives of Europe’s Capital Markets Union’s (CMU’s) project to build deeper and more integrated capital markets. In fact, this year, the Commission released its new CMU Action Plan in a bid to accelerate this process. The health of Europe’s markets is pivotal as they must play a central role in funding Europe’s sustainable transition and supporting new innovative businesses. Therefore, now more than ever, it is crucial to have data-based evidence on how Europe’s CMU objectives are being advanced and to ensure that momentum is maintained in building a fully integrated CMU. Equity markets: resilient but still undersized Europe’s equities markets are an important source of funding for businesses. Corporates and SMEs (small and medium-sized enterprises) especially require affordable funding to facilitate their future growth, and the diversity of equity-finance options makes them well suited to fulfilling this role. Fortunately, in the first half of 2020, EU27 corporates benefited from an unprecedented amount of funding from capital markets. Large levels of funding were seen from equity markets, reaching €45.8 billion in equity-issuance volumes. However, despite an increase in funding for corporates, there is still a serious lack of progress in providing equity to SMEs. The proportion of new equity risk capital for SMEs declined from 2.5 percent in 2019 to 1.8 percent in the first half of 2020. This was driven by a large increase in bank lending, while levels of risk capital remained relatively unchanged from prior years. Crucially, to boost funding levels, securities markets require a more integrated and competitive ecosystem. The Commission has already outlined its intention to review the MiFID 2/R (Markets in Financial Instruments Directive 2) framework as well as to revisit IPO (initial public offering) listing rules. However, more work is required to ensure that the securities market structure is fit for purpose in the post-Brexit environment. A diverse and well-regulated capital market better supports the needs of investors and consumers’ pensions and savings. A positive development for European capital markets over the past six months has been that the COVID-19 crisis has not significantly disrupted European cross-border funding. Indicators show an increase in intra-European integration over the last five years, which has not been reversed by the pandemic. Importantly, 96 percent of European debt offerings were marketed within Europe in the first half of 2020, rather than being marketed globally. This was a 3-percent increase from last year and a substantial rise from 2007. Innovation:the key to future growth As Europe looks to recover from the pandemic, it cannot ignore the importance of investing in innovation. To remain globally competitive, Europe not only needs to boost investment in research and development (R&D) but also foster the emergence of fintech (financial technology) unicorns that could be significant resources of job creation and growth. On this front, in the first half of 2020, Europe performed resiliently. A total of €3.6 billion was invested into European fintech companies over the period. However, more should be done to strengthen Europe’s innovation landscape. For instance, while valuations of fintech unicorns in Europe have continued to grow, more could be done to support the emergence of new unicorns. To help reduce barriers to further R&D investment, positive progress has already been made to harmonise national authorities’ approaches to regulating new technologies across Europe. Over the past year, European supervisory authorities (ESAs) launched the European Forum for Innovation Facilitators to help them share views and experiences and to develop a common approach to fintech regulation. Importantly, the Commission has also recently published its Digital Finance Package, which seeks to harmonise rules on operational resilience and bring forward an EU-wide framework for crypto-assets. This is an important step forward in creating a regulatory environment that is fit for purpose, creates legal certainty and ensures Europe is in a position where it can attract further investment and lead in the digital age. Going forward, the task of policymakers will be to ensure that its policy of harmonisation is widely adopted across the EU27. Maintaining the lead in sustainability Europe, for a number of years, has been considered the global leader in sustainable finance. In the first half of 2020, Europe consolidated this position by reaching €71.8 billion in sustainable bonds issued by June 2020. If this rate of funding is maintained, by the end of the year, volumes should surpass Europe’s record year of issuance (2019). This growth has seen the emerging popularity of social bonds—bonds that raise funds for projects with positivesocialoutcomes. Nearly one-third (27 percent) of sustainable bond issuance in Europe in the first half of 2020 was categorised as social, the largest proportion of the sustainable market in any half-year to date. Crucially, the dominance of Europe in global environmental, social and governance (ESG) markets in 2020 is also reflected by the fact that 52 percent of all global sustainable-bond issuances are taking place in the EU. However, despite its high issuance levels, Europe needs to be wary of complacency. While Europe’s sustainable-finance activity is on the rise, levels of activity vary significantly across the EU. Nineteen European countries have been active in the sustainable-finance market, but new entrants are becoming increasingly rare. Moreover, some countries have not yet tapped the market for sustainable finance. While Europe, as a whole, is pushing forward in utilising sustainable finance, it needs to be a priority of policymakers to ensure that it isn’t pushed by just a few active countries but is instead embraced by the entirety of the EU27. Establishing a harmonised regulatory approach to defining sustainable activities would help reduce barriers to the adoption of sustainable finance across Europe. As Europe absorbs the economic and social hardships during the second wave of the COVID-19 pandemic, European capital markets will again be called upon to support EU businesses. Looking at the performance of European capital markets during the past six months, there has been progress in areas such as sustainable finance, but there has also been a relative decline in areas such as raising capital for SMEs. Europe’s capital markets are still being held back by regional fragmentation and inconsistent legal frameworks. To overcome these challenges, the CMU project now requires ambition and political momentum to achieve the next level of integration. As Europe’s capital markets continue to evolve in the wake of COVID-19, key national stakeholders cannot afford to stand still.

European banks continue to be well positioned from a solvency perspective to support households and businesses during this period of abnormal economic stress. Having entered the Covid-19 crisis with the highest solvency ratios on record, European banks have further increased their capital buffers during 2020 reaching a new record high in core CET1 capital in 3Q 2020 through a combination of profit generation, regulatory support, and balance sheet adjustments. European Global Systemically Important Banks (GSIBs) core capital ratios (CET1 ratio) were 14.18% in 3Q 2020 on a weighted average basis, 55bps above the level reported at the end of 2019 and 418bps above the ratio observed in 2013. Some of the main drivers of the record high in core capital ratios are discussed in this blog. Ban on 2019FY dividend distribution: +30bps on CET1 The ECB and the BoE’s PRA recommended that Euro Area and UK banks suspend their planned 2019 dividend distributions in order to preserve capital and support lending to their customers, thereby helping to cushion the negative economic impact form the Covid-19. According to AFME estimates based on European GSIBs’ public disclosures, compliance with the regulatory request of withholding 2019FY dividend distribution contributed 30bps to banks’ CET1 ratio as at 3Q 2020. Although the dividend ban, which remains in place, has moderately helped to improve banks’ capital ratios, the benefits have come with associated costs. The ban on dividends was implemented across the board and although this avoided potential stigma from some banks being forced to suspend dividends while others were excused from doing so, it did prevent banks with large buffers above their Maximum Distributable Amount (MDA) thresholds from making distributions which they could well afford. Banning dividend payments also disrupted the flow of income to bank investors, life companies, pension funds and retail investors. As such they risked negatively impacting on consumption and further penalising certain parties that are already suffering from the consequences of a crisis that is not of their making. Moreover, withholding dividend payments has significantly depressed bank share prices, increasing their potential cost of equity and inhibiting their ability to use their paper to undertake any corporate activity. It has further disturbed the established relationship with regulators and the processes by which distributions were previously agreed. The intervention may therefore lead to more lasting damage given the precedent created which may result in bank investors imposing an “uncertainty discount” on share ratings to reflect the risk of future unexpected regulatory interventions. Regulatory relief: +24bps on CET1 Recognising the scale of the pandemic, on 28 April, the European Commission proposed targeted changes to the Capital Requirements Regulation (CRR) to maximise the capacity of banks to lend and to absorb losses related to the pandemic. The package mitigates the capital impacts of IFRS9 expected loss accounting and contribute to banks’ capacity to continue to support the economy during the pandemic and through recovery. The measure also included the advanced application of SME and infrastructure supporting factors to facilitate lending to those sectors. The regulatory relief complemented other supervisory guidance that banks should draw down their capital buffers. These regulatory relief measures have contributed to improve banks CET1 ratios by 24bps as at 3Q of 2020 according to AFME estimates based on European GSIBs public disclosures. Earnings retention: +36bps on CET1 Banks have continued to generate internal capital through profit retention, accumulating a total of 36bps on CET1 according to AFME estimates. Most recently, some banks have provided investor guidance by pre-announcing the expected amount of 2021 dividends to be distributed (subject to regulatory approval). The 2021 dividend distribution has been excluded from the contribution of retained profits on CET1. Any future dividend distribution is subject to supervisory approval as the current dividend ban has been recommended by the ECB until 1 January 2021, although the policy measure will be reviewed in December 2020. Any decision on the resumption of dividends is likely to take account of a number of factors but in particular the visibility that banks have of their future capital needs in the context of their prospective levels of non-performing loans. RWAs variation: -10bps on CET1 Most banks have reported an increase in RWAs during the year, predominantly due to the record increase in loan origination and from a rapid growth in market risk RWAs. Market risk RWAs have risen due to the significant increase in market volatility and trading activities during the year. The reallocation of business capacity to support companies during the pandemic has resulted in a negative contribution of 10bps on CET1 ratio. This impact excludes the regulatory support measures which, particularly the introduction of the SME and infrastructure support factors, reduced the risk weights on loan origination for those sectors. Change in CET1 ratio by components in 2020 (1Q-3Q) (%) Source: AFME with data from European GSIBs earnings reports. *RWAs excludes impact of regulatory relief on RWAs. While the full effects of the Covid-19 induced economic downturn are still somewhat uncertain, banks remain very strongly capitalised and willing and able to support all viable customers while at the same time absorbing an inevitable increase in non-performing loans. As we move into 2021, they should be allowed to resume cautious distributions in support of their shareholders.

When the International Monetary Fund (IMF) meeting is held remotely this year, there is no doubt that Covid-19 will be at the top of the agenda. Following the economic shock generated by the pandemic, the world is facing its deepest ever recession. This will require financing to keep businesses afloat and fund the global economic recovery. However, to ensure global markets remain resilient in the future, the economic recovery must be environmentally, socially and also financially sustainable. The EU has set a target to become climate-neutral by 2050. To achieve this and drive sustainability on a global scale, it is even more important to accelerate the low-carbon transition and embed environmental, social and governance (ESG) standards across all industries. No individual sector can be the sole driver of the change, and sustainability policy needs to be pushed in political synchrony across both the financial and the real economy. Economic sectors and markets are interconnected and, while the financial sector will drive forward the funding of Europe’s ambitious transition, it also has the challenge of supporting industries that are still in their sustainability infancy. Europe’s ESG goals cannot be achieved through ambition alone. It is going to require a cohesive approach that incentivises organisations to take greater risk to make Europe’s sustainable economy a reality. Striking the right balance One of the challenges of the sustainable transition is ensuring that the ambitious sustainability targets are within the capacity of the real economy. This is vital in evaluating whether an organisation is capable of radically changing its operations in the short term and can determine the best approach to incorporating ESG as part of its core business model. While some organisations might have already taken great strides to become more sustainable, others might still be in a period of transition. Penalising investment into sectors that are in the process of change would be inappropriate as it might deprive them of the capital they need to complete this process and thus undermine the ultimate end goal. For organisations that can prove they are trying to become more sustainable, a realistic and just approach is necessary to accompany them in this critical transformation. To overcome the challenge of accelerating the transition across different industries, establishing clear and measurable targets in Europe’s sustainable transition roadmap will be key. While the Paris Agreement presents a clear end-goal for major EU industries, the roadmap to reaching this is less well-defined. Different industries will experience different challenges and therefore warrant different targets. Including steps and milestones for each industry will help create practical strategies, giving clear signals if and when certain economic activities need to be phased out to meet the objectives of the European Green Deal. This will give industries clear short-term and long-term objectives to be measured against, and ensure no sector is left out of the transition. Funding the transition To help industries reduce barriers when accessing finance through sustainable investment, co-operation between public and private sectors is going to be key. Particularly in the post-Covid-19 environment, where capital markets alone might not be able to supply all the necessary capital to support organisations’ sustainability journeys – establishing incentive and risk-sharing mechanisms through a partnership of public and private sectors will be required. This will prove important in the support of early-stage research and innovation projects, as well as projects that are in the process of scaling up. Support could come in the form of public programmes and financial instruments that streamline application processes and thus lower barriers to private investment into projects. Equally, support could also come in the form of grants, debt or equity, including structured finance, that are tailored to the different stages of a project’s development. Any grants should include incentives where additional funding will be provided as organisations hit their sustainability targets. Moreover, equity financing could be provided through a dedicated EU Green Deal Fund that is contributed to by the EU, national and regional capital, while also allowing private investors to participate. Crucially, no single sector or type of financing should be seen as the sole catalyst for the sustainability transition. If governments want to foster innovation to aid the transition, the same innovation will need to be shown on their side to maximise the funding to support sustainable projects. Working from the same sheet To accelerate Europe’s low-carbon transition and prevent misleading claims on the environmental nature of investment products (‘greenwashing’), there is a need to better identify sustainable investment opportunities and evaluate the embedded risk. In recent years, there has been a rapid growth in financial products linked to sustainability; yet their full uptake and mainstreaming requires a breadth of corporate ESG data that is not currently available. This information is needed to establish how ESG considerations affect risk and return of investment and lending activities. So far, a big challenge has been the proliferation of unstandardised approaches on reporting, collecting and analysing ESG data. This makes it difficult for investors and lenders to compare and evaluate an issuer’s or a borrower’s ESG profile. Moreover, the lack of harmonisation in sustainability reporting frameworks and ESG rating methodologies dramatically increases the cost for firms, both corporates and investors, that operate across borders and have to engage with multiple reporting standards and ESG rating methods. This has resulted in ESG data being largely incomplete and insufficient to encourage widespread ESG investment. Making ESG reporting standards mandatory as the first step, rather than voluntary, would go a long way to alleviating these challenges by helping promote the availability of useful information for decisions. In addition to making reporting approaches more standardised, it is also necessary to establish an accessible global reporting framework (or a few key frameworks) that all organisations and jurisdictions can work with. The overall EU framework for sustainable finance is complex, and could benefit from simplification to encourage wider adoption and international uptake. For example, significant expertise is required to analyse and understand the technical criteria of the EU taxonomy for sustainable activities, particularly when it needs to be supplied under tight deadlines. Considering that the current sustainable finance landscape is not static, with organisations also needing to navigate new rules, the challenge is only going to become greater. A reduction in the complexity around the new requirements and terminology used would help industries better understand their obligations, adjust their corporate strategies and act on plans towards the sustainable transition. The role of technology A key to overcoming these challenges could lie in embracing new technologies. Technology such as artificial intelligence and machine learning present additional avenues for gathering ESG information, such as geospatial data, as well as the capacity to process information faster. For example, this could include the scanning of online news articles, identifying information that might affect ESG scoring. Moreover, the implementation of digital data sharing spaces, where organisations can share their information, would allow different industries to learn from one another and better enable firms to assess their ESG risks and impacts, and meet their sustainability objectives. From a product standpoint, digital tools, such as distributed ledger technology, could present more opportunities to co-financing local sustainability projects. This could be applied to green bonds that would open up ESG investment to new markets, allowing more citizens and firms to participate in the sustainable transition. However, to ensure that the financial sector can harness new technologies, it is important that future regulation is technology-neutral and innovation-friendly. A cross-sectoral approach to ESG data sharing should be embraced and supported. Currently, digital tools and platforms operate mainly at a domestic level. There is a need to remove any potential barriers against using these digital platforms and tools across borders. Doing so would further encourage their use. This should not only be facilitated on a European level, but also globally. Climate change and other ESG challenges are global in nature and require harmonised global action. Translating ambition into action As the world gathers for its first remote IMF meeting, while the focus will be on establishing the pathway for the global economic recovery, it should also be viewed as an opportunity for advancing the sustainability agenda. Covid-19, despite having created global challenges on an economic and social level, also holds the impetus to accelerate the sustainable transition. As jurisdictions rebuild, never has the importance of human wellbeing inherent in ESG principles been more relevant. Investment in products with ESG focus has been growing and there is no lack of ambition in building more sustainable economies. The objective now is to translate this ambition into a harmonised roadmap that all industries can understand and work towards. Ambition alone is not enough to achieve the goals to combat climate change and support societies. Barriers need to be broken down, not only across borders and sectors, but also in politics.Sustainability is a not separate agenda; it must permeate all our policy-making. This article was first published in The Banker:5/10/2020

The European Commission has unveiled its long-awaited new Action Plan for Capital Markets Union (CMU). Featuring 16 sets of actions with their respective timelines, the Action Plan outlines the strategy for the next phase of the CMU and expected legislative initiatives on capital markets through 2023. The current juncture provides a renewed sense of purpose and urgency to the CMU. EU capital markets must be fit for the challenge of promoting long-term economic growth and a recovery from the severe impacts of the Covid-19 crisis. The new CMU strategy should also respond to the implications of Brexit and support the EU’s competitiveness on the global stage. Importantly, the Action Plan has also reinforced the link between the CMU agenda and the digital and green transitions. Strong capital markets must play a central role in mobilising the investments to advance the EU’s digital strategy and fulfil ambitious climate change targets. Promoting investment and re-equitisation Are-equitisationof Europe’s companies and financial landscapeis one of the immediate priorities in the face of the Covid-19 crisis. It is important to see a commitment from the Commission to apply the flexibility embedded in Basel III to ensure the appropriate prudential treatment of long-term SME equity investments by banks, , together with a pledge to assess possibilities for promoting market-making activities. More generally, we hope that the forthcoming CRR3 proposal will reflect the CMU objectives in promoting liquid capital markets, such as the implementation of the FRTB, the CVA, and SA-CCR. The review and simplification of listing rules, on the basis of careful analysis, will be another fundamental workstream to promote access to public markets, particularly for SMEs. Another key project will be the establishment of a EuropeanSingle Access Point(ESAP) to improve access to company financial information across the EU. Further work should be undertaken to ensure synergy and compatibility between reporting obligations at the EU and national levels and the information to be submitted to the ESAP. Enhancing efficiency, connectivity and competitiveness in securities markets There are several work areas envisaged in the Action Plan to improve the functioning of EU securities markets. European authorities must redouble efforts to bring to fruition aspirations such as the introduction of a common EU-wide system for withholding tax relief at source and the establishment of an EU-wide definition of “shareholder”, as well as other actions intended to improve legal and operational consistency in the single market. The upcoming review of the MiFID 2/R framework will also be fundamental in advancing the CMU objectives. A strong and competitive equities trading ecosystem is clearly essential to promote re-equitisation and enhance the attractiveness of EU capital markets. It is encouraging that the Commission intends to take forward the establishment of an effective post-trade consolidated tape for equity instruments. While there are challenges to address, a well-designed infrastructure has the potential to democratise access to European markets by providing all investors with a comprehensive and standardised view of the European trading environment. There will be other major issues to consider in Europe’s securities markets structure, not all mentioned in the Action Plan. A central guiding principle of the future MiFID 2/R review should be supporting positive outcomes for EU investors who, let us not forget, are the ultimate beneficiaries of capital markets. A diverse and well-regulated capital market, with a range of trading mechanisms and not reliant upon one category of trading venue, better supports the needs of investors and consumers’ pensions and savings. The Action Plan notes that the EU needs to develop its own critical market infrastructure and services while remaining open to global financial markets. It will be important to see how the concept of “open strategic autonomy” is applied in future workstreams. We should recall that international investors and firms headquartered outside the EU can also play an important role in generating investment and growth opportunities for EU stakeholders. Restoring a well-functioning European securitisation market It is very positive to see the Commission’s intention to carry out a comprehensive review of the EU securitisation framework for both simple, transparent and standardised (STS) and non-STS securitisation in order to scale-up the securitisation market in the EU. Securitisation can be a vital mechanism to support the financing of the real economy, particularly for SMEs, and the management of the expected increase in levels of NPLs, among other functions. It can also be an important tool in supporting ESG investment. The CMU High-Level Forum provided well targeted and prudentially sound recommendations to adjust the securitisation framework. They should be implemented to their full extent. Policymakers must seize the opportunity The importance and urgency of the CMU project hasneverbeenmore obvious. While this is a long-term project, the combined challenges of Covid-19, Brexit and the green and digital transitions should focus minds and provide momentum towards achieving far-reaching measures in this EU legislative cycle. Policymakers should now take advantage of the unique political context to work towards a fully-fledged and globally-competitive CMU with the potential to support growth, sustainability and transform the EU capital markets landscape.

On 25 June, AFME and Simmons & Simmons hosted our second panel/webinar with the Financial Conduct Authority (FCA) discussing LIBOR conduct and compliance risks. This session focussed on client communications. First, the implications of the UK Government’s decision to enhance the FCA’s powers under the Benchmark Regulation were discussed. Although this decision will be significant in helping to ensure an orderly wind-down of critical benchmarks such as LIBOR, the FCA emphasised that industry participants should remain focused on active transition (of which client communications plays a big part), urging the industry “Please don’t take your foot off the gas, this remains a priority”. On the topic of Covid-19, it was appreciated that it has had an impact on the interim transition timelines for firms and clients. The FCA understands the short to medium-term challenges faced by firms and delays to some aspects of transition caused by the pandemic, and have been operating with pragmatism during this period. However, the FCA noted that communications will need to be ready for when the time is right for clients and importantly, that the deadline that firms cannot rely on LIBOR beyond end 2021 for LIBOR [MR1]remains the same. In fact, the FCA emphasised that client communication strategies may need to be accelerated, particularly if they were due to have been progressed earlier in the year, and firms should expect supervisory engagement in this regard. Panellists noted that the impact of Covid-19 on communications has varied depending on the client segment. For instance, some firms might be more likely to continue having conversations with large corporate clients, but conversations with SME clients might have been delayed. This slowdown has also impacted the roll-out of alternative rate products and consequently the build-up of liquidity in the alterative rate market. However, despite the slowdown, it was acknowledged that in recent weeks there have been positive signs of progress. As with Covid-19 communications, a tailored approach across client segments and product lines is important, but flexibility should also be built into communication strategies to allow for market developments and client needs evolving over time. Understanding the client base will be key to effective communication on LIBOR transition and this will involve gaining as full a picture as possible of clients’ exposures. Firms could consider a number of factors when devising communication strategies: Knowledge, understanding and experience of the intended audience. E.g. large corporate clients compared with retail mortgage holders. The type of product. E.g. Different contracts and currency might have varying levels of complexity when being amended. The geographic location of the customer and any market-specific considerations. E.g. some markets do not have a forward-looking term rate. Firms must also take cross-border rules into account when advising clients in different jurisdictions. Determining the most effective means of engaging with clients for different communications. E.g. Phone, email, website. There was some discussion of the requirement to ensure that client communications are “clear, fair, and not misleading”.[1] The FCA noted that information should be presented in good time, to enable clients to make informed decisions. Additionally, for products referencing LIBOR which mature beyond 2021, firms will need to properly explain to clients what may happen to the rate and how the fallbacks operate. It was highlighted that the best way to avoid additional LIBOR-related conduct risks is to offer alternative products that do not reference LIBOR. However, it is important that wherever alternative options are presented for new products or to change existing products, firms will need to make sure they are reasonably presented, including their benefits, costs and risks. Panellists agreed that communication strategies and the terminology used need to be considered, taking into account the level of sophistication of certain clients. For less sophisticated clients a balance should be struck between keeping communications as simple as possible, while not forgoing the use of important terminology when discussing the topic, which in itself could be confusing if firms switch to using different terms from those widely used in the market. For example, firms should consider whether the term ‘risk-free rate’ could be misunderstood (notwithstanding that it is a term which is widely used in some parts of the market / industry) and consider providing further context and detail. Panellists pointed to helpful resources such as the Factsheet published by the Working Group on Sterling Risk-Free Reference Rates, which can assist in client education. In a similar vein, front office and supporting staff also need to be trained as staff need to build up their awareness and understanding of the implications of LIBOR transition for clients. Firms may wish to begin by educating all relevant staff on the topic in a broader context and then build on this with more tailored training dependent on the function (e.g. front office, legal, compliance). Training could be facilitated through various methods such as E-learning, webinars, or daily updates. For more specific training, and particularly where staff engage directly with clients, more classroom style- training where scenarios can be discussed may be most effective. Finally, panellists discussed the need to monitor the effectiveness of their communication strategies. Communications should be measured against their intended purpose, for example firms could monitor whether information published on their website is getting the high footfall that might be expected for such a public medium. Firms should consider how they collect data on their communications in such a way that it can be aggregated for use as Management Information, both to inform the evolution of the strategy and to validate the work that the firm is undertaking. Panellists also discussed possible ways to record the client communications that have taken place, for example by using already existing record keeping systems and making adjustments where necessary for the purposes of LIBOR transition (whilst at the same time not introducing record keeping requirements which are inappropriate). As proceedings drew to a close, the take-away message from panellists was that it is never too early to start LIBOR transition communications. While the deadline might seem far away, firms will need ample time to regularly update their staff and clients on what is a constantly evolving process. While acknowledging ‘first mover’ reluctance, there is a risk in waiting too long. Communication plans need to be detailed, dynamic and ramp-up as we move ever closer to the end-2021 deadline. To read in more detail about the practical guidance for firms in their approach to client communications, read the full AFME and Simmons & Simmons paper. Watch the webinar, clickhere AFME Contacts Richard Middleton Managing Director, Head of Policy [email protected] +44 (0)20 3828 2709 Fiona Willis Associate Director, Policy [email protected] +44 (0)20 3828 2739