Nicolas Véron

Financial Statements: The evolution of European banking supervision

In today's session, I hosted Claudia Buch, chair of the Supervisory Board of the ECB, and Karen Petrou to discuss ongoing changes in European banking supervision and how they relate to debates in the United States. 

Financial Statements: Structural changes and policy developments in the Japanese financial system

In today's session, I hosted Japanese FSA Vice Commissioner Toshiyuki Miyoshi and independent writer Richard Katz to discuss ongoing developments and initiatives in relation to Japanese finance. 

Hearing at the Dutch House of Representatives on Russia's immobilized reserve assets

In a parliamentary roundtable held in hybrid format yesterday, I testified on Russia's immobilized reserves together with Marc Roovers (De Nederlandsche Bank), Nico Schrijver (Leiden University), Bill Browder (Global Magnitsky Justice Campaign) and Martin Sandbu (Financial Times). My brief prepared statement was republished by PIIE. The video of the event is available here.

Financial Statements: Update on Ukraine's financial situation as war enters third summer

In this week's episode on June 25, I hosted Maria Repko, deputy director of the Centre for Economic Strategy in Kyiv, and Elina Ribakova of Bruegel, PIIE and the Kyiv School of Economics. 

Europe's Banking Union at Ten: Unfinished Yet Transformative

My new book on European Banking Union was published this week by Bruegel in PDF format, and simultaneously as a Working Paper by the Peterson Institute. Initially suggested two years ago by PIIE President Adam Posen, this was a labor of love that led me to revisit a lot of related literature and interview a number of key protagonists. The Bruegel version includes a wonderful foreword by Bruegel Director Jeromin Zettelmeyer, and will be printed in physical book format in the next few weeks.

Bruegel also organized a launch event on Tuesday (June 25), of which the video recording is available in replay. It featured European Commissioner Mairead McGuinness, former ECB Vice President Vitor Constâncio, and senior Commission official Maarten Verwey, with moderation by Rebecca Christie. 

Separately, independent host Tim Gwynn Jones recorded a podcast in which he quizzed me about some of the main novel findings I presented in the book, particularly the decision-making sequence in late June 2012 that shaped the establishment of European Banking Supervision, the main component so far of the broader banking union project which came into force a decade ago. 

Financial Statements: China's experience of promoting venture capital investment

In yesterday's session, I hosted Li Bo of Peking University Guanghua School of Management and Daniel Gros of the Institute for European Policymaking at Bocconi University, comparing Chinese and European experiences of government intervention in the venture capital market.

Financial Statements: Can auditors better serve investors' needs?

In the session on May 14, I hosted Saba Qamar of the U.S. Public Company Accounting Oversight Board, and Charles Henderson of the UK Shareholders' Association. 

Europe's capital markets union: Make it or break it

This blog post was published in March by Bruegel and PIIE. 

For ten years, the European Union has promoted the project it calls capital markets union (CMU), with the goal of setting up well-developed, well-integrated capital markets that would span the entire union and allow it to mobilize its high savings for growth and investment. But the CMU project has not delivered material results. It should be given a last chance, with a focus on integrating markets supervision at the European level.

The vocabulary of CMU was coined by Jean-Claude Juncker on July 15, 2014, in his maiden speech to the European Parliament as president-elect of the European Commission. In promoting the idea, Juncker was probably motivated by concerns about the trajectory of the United Kingdom, which was becoming increasingly estranged from the momentum of institutional build-up happening in response to the euro area crisis.

The CMU project, the reasoning went, would place the United Kingdom at the center of a happy vision of EU integration that would be naturally London-centric, given the City's dominant role in Europe's capital markets. Simultaneously, the vision of the CMU echoed policy concerns raised by the European Central Bank and others about the need for capital market integration to increase the EU financial system's resilience against asymmetric shocks while not requiring further fiscal integration.

Something for everyone, it seemed. But as discussed in my in-depth analysis published on March 18 by the European Parliament, the price was a built-in lack of clarity on the project's actual aims and, even more so, its policy content. The political imperative not to generate any controversy with London meant that the CMU would only prioritize incremental regulatory adjustments. The implied rejection of any more ambitious options belied the very semantics of capital markets union, which promised—like the banking union initiated in 2012—something more than business as usual.

The European Commissioner then in charge, Jonathan Hill, rationalized this contradiction by trumpeting his focus on "low-hanging fruit," as if the European Union had been neglecting its orchard in the previous 15 years of near-continuous financial-sector reform initiatives. Predictably, not much happened, either before or after the Brexit referendum that removed the CMU's initial motivation altogether.

Ten years on, the CMU project's main features appear largely unchanged from the time of its birth: big on rhetoric, small on policy. Political leaders at EU and national levels pay eloquent lip service to the vision of well-developed, liquid, and deep capital markets, which would boost EU strategic autonomy, power the green transition, enable the blossoming of innovative start-ups and their rapid growth into global champions, and perhaps eventually rival Wall Street. When it comes to action, things suddenly become less awe-inspiring.

To be sure, the EU machine has churned out useful capital markets legislation over the past decade, including the European Single Access Point for corporate disclosures, the so-called consolidated tape of transactions data, and the European Long-Term Investment Funds, which may become a successful investment product. This track record of regulatory reform, however, is no more than in line with the usual pace of regulatory harmonization as seen before CMU was invented.

As for the stated aim of fostering market integration through convergence in structural areas such as taxation, insolvency law, or pension finance, the achievements so far are too minuscule to mention, suggesting that any fruit in these areas outside the core scope of financial services policy should be viewed as rather high-hanging. The ECB has summarized a widespread perception by stating bluntly in a March 7 statement on CMU that "there are no more low-hanging fruits to pick in this area."

Is the CMU project doomed to fail? Possibly. But it can and should be given a last chance. Between the low-hanging fruit of marginal adjustment and the high-hanging ones of taxation, insolvency, and pensions, a mid-hanging fruit beckons that may not be out of reach: supervisory integration, namely the build-up of an authoritative EU capital markets supervisor—a "European SEC," as ECB president Christine Lagarde called it, in reference to the powerful US Securities and Exchange Commission. An effective European markets supervisor could catalyze the gradual dismantling of hidden barriers to cross-border market amalgamation.

In practice, supervisory integration would entail reconstructing the existing European Securities and Markets Authority with new governance, a new funding framework, and possibly new locations that would pave the way to significantly expanding its direct supervision activities. The European Commission attempted something like that in 2017 and failed. But chances of success are greater now, for at least three reasons.

First is a sense of urgency, driven by the perception in the European Union of being left behind by US capital market dynamism and the increasingly pressing necessities of the climate transition and safeguarding EU security. Second, after ten years, the inability of the low-hanging-fruit approach to deliver transformational outcomes has become inescapable. Third, there now exist compelling proofs of concept of integrated European supervision in adjacent areas, principally European banking supervision, which has been generally successful, and also the soon-to-be-established Anti–Money Laundering Authority. Against that backdrop, the idea of EU-level capital markets supervision, which ten years ago could still be dismissed as utopian, looks increasingly like a no-brainer.

Making it happen would finally transform the CMU into a substantial project. Conversely, if a combination of nationalistic reflexes and entrenched special interests stop it from happening, then the time may have come to finally stop talking about capital markets union.

Financial Statements: The International Sustainability Standards Board's first two years

In today's session, I hosted the ISSB's Sue Lloyd and Sylvie Goulard to discuss sustainability-related disclosures, following up on the session two years ago in the very early days of ISSB activity. 

Financial Statements: The rise and decline of venture capital in China

In today's session, I hosted Harvard Business School's Josh Lerner and entrepreneur Rui Ma on the ongoing transformation of China's venture capital investment landscape.  

Financial Statements: The future structure of the US banking sector

In today's session, I hosted Sheila Bair and Graham Steele to discuss the structural impact of the US regional banking crisis of March 2023 and ongoing financial regulatory policy debates.

Study for the European Parliament: Capital Markets Union, Ten Years Later

The European Parliament today published this paper in which I look back at ten years of the EU Capital Markets Union project, lessons learned, and options to revive or eventually abandon it.

Financial Statements: Prospects for reform of emergency liquidity assistance to banks in the US

In today's session, I hosted Yale's Andrew Metrick and the European Central Bank's Cornelia Holthausen to debate central banks' liquidity provision to banks in the United States, the euro area, and beyond. 

Financial Statements: How banking prudential policy can respond to climate change risks

In today's session, I hosted Martien Lubberink and Sylvie Mathérat to discuss the interplay between climate concerns and banking prudential regulation and supervision. 

Financial Statements: China's overhaul of its financial supervisory architecture

In today's session, I hosted Harvard Business School's Meg Rithmire and Yeling Tan of Oxford University and PIIE, for an overall bleak assessment of financial sector reform in China. 

Financial Statements: Next steps for the Basel Committee on Banking Supervision

In today's session, I hosted Neil Esho, Secretary-General of the Basel Committee, and Isabelle Vaillant, self-described as "Ms Single Rulebook" at the European Banking Authority.

PIIE Tracker: Share of China’s top companies in the private sector continued to steadily decline in 2023

The Peterson Institute just published this latest iteration of our half-yearly tracker co-authored with Tianlei Huang. 

The share of China’s private sector among the country’s 100 largest listed companies, measured by aggregate market capitalization in the half-yearly PIIE tracker, continued to decline through 2023. It dropped from 38.1 percent in mid-2023 to 36.8 percent at the end of 2023, extending a nonstop slide since its mid-2021 peak of 55.4 percent. The private sector is defined restrictively as firms with less than 10 percent state ownership. Meanwhile, the share of the state sector, including both mixed-ownership enterprises (MOEs), in which the state owns between 10 and 50 percent, and majority-owned state-owned enterprises (SOEs), continued to advance in 2023, rising from less than 60 percent a year ago to more than 63 percent at the end of 2023.

This PIIE tracker, based on the methodology defined in our 2022 Working Paper, is an indication of market sentiment, not of real economic performance, and of relative shares not absolute levels of market value. The continuous retreat of the private sector among the largest listed companies aligns with a wealth of anecdotal evidence that the Chinese leadership’s 2023 rhetorical pivot in favor of private sector development, against prior emphasis on taming the “disorderly expansion of capital,” is not yet viewed by private sector participants as more than just lip service. The tracker suggests stock investors feel the same way.

The main driver of the slide in relative share is the continuous decrease in aggregate value of the private-sector listed companies among the top 100, which declined to less than US$2 trillion at end-2023 from its mid-2021 peak of US$4.7 trillion. By contrast, the aggregate market value of SOEs has been disconcertingly stable in recent years. Notably in the end-2023 ranking, Pinduoduo, the private-sector parent of online shopping platform Temu, gained prominence by becoming the fifth-largest listed Chinese company by market value for the first time. Despite their commercial success, private-sector battery giants BYD and CATL lost relative prominence in comparison with previous rankings. Private-sector internet giant Tencent keeps its longstanding top slot. The highest-valued SOE remains distiller Kweichow Moutai, followed by Industrial and Commercial Bank of China, as has been the case continuously since 2020.

Authors’ note: Earlier versions of the tracker in this series misidentified Yili Group and Jiangsu Yanghe Brewery as nonpublic enterprises in some years whereas the companies should have been coded as mixed-ownership enterprises. The impact on the chart is immaterial. This version of the chart and replication data file have been updated.

Financial Statements: Lessons from the 2023 collapse of Credit Suisse

In today's session, I hosted Eva Hüpkes in her capacity as member of the Swiss expert group that delivered its report in August 2023, and leading bank equity analyst Jérôme Legras. 

Cash keeps accumulating at Euroclear Bank as a result of sanctions on Russia

The Peterson Institute today published this abridged version of my earlier Bruegel blog post in its PIIE Charts series. 

Shortly after Russia’s full-scale invasion of Ukraine in late February of 2022, a number of governments, including the United States, all of the European Union, Japan, and others, immobilized the Bank of Russia’s reserve assets under their jurisdiction, meaning the assets remain property of the Bank of Russia, but the latter cannot move them from where they are held. Thanks to gradually increased transparency, the European Union has emerged publicly as the dominant player in that coordinated action. Most of the immobilized assets are held at Euroclear , the Brussels-based international central securities depository.

In the hushed world of central bank reserve management, no such information is usually disclosed, but the amount at hand is just too large to stay hidden: the balance sheet of Euroclear Bank, the relevant subsidiary of the Euroclear Group, has grown more than fivefold since early 2022 from its prior stable level. Euroclear does not publish the amount of securities the Bank of Russia holds there, but it must account for the cash balance in quarterly disclosures of its own total assets.

Euroclear’s contractual arrangements specify that cash held there is non-remunerated, to discourage clients from using it as a “safe house” for their spare money. When securities come to maturity or pay dividends or coupons, investors usually take the cash away or reinvest it into other securities during the same day, so that no amount is recorded on the Euroclear balance sheet. Because the immobilizing sanctions prevent the Bank of Russia from doing that, its cash keeps accumulating at Euroclear without yielding any interest to the Bank of Russia, on a scale that now reaches more than half of all its immobilized reserve assets in the G7, the European Union, and Australia, estimated at around €265 billion.

Because the Bank of Russia’s cash deposit at Euroclear is unambiguously noninterest-bearing, there is a solid argument that the interest income that Euroclear makes on it, in the high single-digit billions of euros annually at current rates, belongs to Euroclear and not to the Bank of Russia. That income could thus be appropriated by the European Union for Ukraine’s benefit, without expropriating the Bank of Russia and thus staying in line with the European Union’s commitment to the international rule of law. The European Union plans to provide €50 billion of financial assistance to Ukraine over the period 2024–27, an amount it may have to further ramp up depending on developments on the Ukrainian frontlines and in the US Congress. The income from the immobilized assets would not cover the full aid package, but it would still help.

 

Report for the French Government: Independent economic policy and evaluation in France

The French government yesterday published a report which Jean-Luc Tavernier (head of French statistical agency INSEE) and I delivered in November to Prime Minister Elisabeth Borne, in response to an assignment letter she sent us in March 2023. The report looks at how to improve independent economic policy and evaluation in France, especially in entities that rely on government funding. 

You may download the report here in case the above link is broken. 

The European Union should do better than confiscate Russia’s reserve money

This blog post was published today by Bruegel. 

What to do with Russia’s foreign reserves, immobilized since Russia’s full-scale invasion of Ukraine, is primarily a matter of decision for the European Union, where most of these reserves are held. The EU should keep giving Ukraine the financial support it needs for its defence and other government expenditures but, in the present circumstances, should not confiscate Russia’s reserve assets to finance its support to Ukraine, given the EU’s commitment to a rules-based international financial order. It could, however, offset some of the financial burden by appropriating the extraordinary income made on Russia’s cash balances by central securities depositories such as Euroclear. The EU has a robust enough case that such income does not belong to Russia.

At least €206 billion of Russian reserve assets is held in the EU, according to an EU document leaked in March 2023, representing more than three-quarters of a total estimated by the G7 Finance Ministers at $280 billion (about €265 billion), which was immobilized in late February 2022. Of this, €180 billion is held at Euroclear, the Brussels-based central securities depository, plus possibly a few billion at Clearstream, its Luxembourg-based competitor.[1]

By contrast, Russian reserves immobilized in the United States, the amount of which has not been disclosed, are unlikely to exceed single-digit billion dollars, and those in Australia (which is included in the G7 tally) and Canada are probably even less. That would leave the remainder, perhaps €40 billion to €50 billion, in Japan, the United Kingdom and EU countries other than Belgium. Additional countries like Switzerland and Singapore have immobilized Russian reserves, but those are not counted in the G7 total.

A European decision

The collective decision to go ahead with immobilization, taken shortly after the war started, was reportedly catalyzed by Italy’s then-prime minister Mario Draghi, according to former U.S. Deputy National Security Advisor Daleep Singh in an interview a year later. Similarly, the decisions on possible next steps, including the option to confiscate the immobilized reserves, will be made primarily by Europeans, because Europe is where the money is, even if decisions are coordinated within the G7.

The debate about such next steps is plainly about resources for Ukraine, not those of Russia. This is because the immobilization was successful, with no leakage back to Russia (and also a powerful deterrent for other jurisdictions that have reserve assets abroad and may be tempted to invade their neighbours). The G7 declaration states, credibly, that “Russia’s sovereign assets in our jurisdictions will remain immobilized until Russia pays for the damage it has caused to Ukraine.” Russia has ostensibly written off the immobilized assets, as illustrated by its cynical suggestion that the reserves should be contributed to the loss-and-damage fund discussed at the COP28 in Dubai. Moving from immobilization to confiscation would not change the Putin regime’s financial equation, nor would it have any short-term impact on Russia’s economy. From that standpoint, there is no damage in prolonging the status quo. There is even value in keeping long-term options open.

As for the Ukrainian government, its need for external finance has been covered in 2023, largely thanks to predictable and timely payments from the EU (in contrast to 2022, when the EU was shamefully late to deliver on its commitments). With Ukrainian GDP at about €200 billion in 2021 before Russia’s full-scale invasion, it is improbable that such external financing needs should ever exceed annual amounts in the tens of billions, including capital expenditure for emergency repair of destroyed critical infrastructure.[2] Given the invaluable contribution of Ukrainian defence to European security, for the EU to spend on it a few tens of percentage points of its own GDP (€16 trillion in 2022) is the ultimate policy no-brainer. Indeed, it is expected that the EU will confirm a large-scale support package early in 2024.

Against these realities, the reported eagerness of the US government to move from immobilization to confiscation appears to principally reflect the Biden Administration’s difficulty in securing congressional approval for US financial support to Ukraine. Facing US domestic deadlock, and given that its own vital interests at stake, the EU might usefully consider further increasing its own financial contribution to Ukraine’s defence. But that by no means implies that confiscation of the immobilized reserves has suddenly become a good idea.

No good argument

The argument against confiscation has not changed. As the EU is not at war with Russia, confiscation would be widely viewed as unlawful, or theft, in much of the world outside the G7, undermining the hitherto credible European claim to stand for the international rules-based order. Only a broad-based international court would have uncontested authority to deprive Russia of ownership of its reserves, and no corresponding judicial mechanism is available for that at present. Even though there are dissenting opinions among legal scholars, and grey zones abound in international law, chances are that confiscation would breach international and EU principles on sovereign immunity and on the proportionate and reversible nature of countermeasures (of course, analysis on whether confiscation would be legal under US law is mostly irrelevant to EU decision).

Confiscation now would set a problematic precedent and incentivise global financial fragmentation. Trust in international monetary arrangements would be undermined to a considerably greater extent by confiscation than by the inherently reversible immobilization, for which precedents exist. That would disincentivise several central banks from holding their reserve assets in euros. It would also deprive the EU of potential future leverage in some scenarios of negotiations to come, even though no such scenario is probable as long as Vladimir Putin remains in power. Furthermore, it could expose EU countries that perpetrated misdeeds in the past to more pressure from their own claimants. In short, the EU would lose stature and damage global public goods it otherwise cherishes, for the sake of gaining an amount of money that it can do without.

Windfall income

By contrast, the EU’s idea of using the windfall income made by central securities depositories (CSDs) on Russian cash blocked on their balance sheet does not entail similar downsides, because of specific contractual arrangements between European CSDs and their account holders, including the Bank of Russia. It is unclear if similar arrangements exist in other jurisdictions where Russian reserves are immobilized.

These conditions make it explicit that the CSD does not remunerate cash balances, and therefore that the interest income it makes on them (eg by depositing them at a euro-area central bank) does not belong to the account holder. Normal account holders are incentivised not to keep any unremunerated cash balances at CSDs but, because the EU sanctions prevent the Bank of Russia from taking its money out, cash has accumulated as its securities held at Euroclear have come to maturity (Figure 1).

The proposition that Russia has no claim on the CSDs’ income appears solid enough for action that does not violate international and EU law to be taken in the near term, even though it is likely to be tested in court including outside the G7. Such action, namely appropriating the CSD’s windfall income and making it available to Ukraine, would multiply the impact of the announcement already made by Belgium that it would earmark the corporate tax revenue it collects on Euroclear’s windfall income for support to Ukraine. The amount of several billion euro of annual income (at current rates) is not enough to meet all of Ukraine’s needs, but it is not negligible either. Its future size will of course depend on rates decisions made by the European Central Bank, and therefore cannot be predicted with certainty.

In sum, the EU must keep giving Ukraine the money it needs to defend itself. Confiscating Russia’s reserves to do so would be a show of weakness in the present contest of willpower. The EU can afford to resist the temptation and keep to its current high ground.

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[1] The EU document refers to €180 billion of Russian reserve assets held at Euroclear (not named but unambiguously referred to), €5 billion in additional Russian reserve assets held at other Belgian entities, and a total €191 billion apparently also including €6 billion of income made by Euroclear on the Bank of Russia’s cash balance, which does not belong to the Bank of Russia. The total of €206 billion is obtained by adding the Bank of Russia’s €185 billion held in Belgium to the €21 billion mentioned in the same document as held in another (unnamed) EU country. The estimate of a few billion held at Clearstream is inferred by the author from Clearstream’s financial disclosures.

[2] Estimates of the cost of postwar Ukrainian reconstruction, made for example by the Kyiv School of Economics and the World Bank, run into the hundreds of billions of dollars or euros. The present debate, however, must realistically be focused on the inherently more limited scope of wartime expenditure.

Financial Statements: The US debate about the final Basel III Accord

In today's session, I hosted Stephen Cecchetti of Brandeis University and Yao Zeng of Wharton, on the rules proposed by U.S. bank regulatory agencies to implement the final package of reforms negotiated in the 2010s at the Basel Committee on Banking Supervision, known colloquially as Basel III Endgame. 

Financial Statements: Has China entered a balance sheet recession?

In today's session I hosted Richard Koo and Guo Kai to discuss the prospect for China to escape the kind of macro-financial vicious circle that entrapped Japan in the 1990s. 

Financial Statements: Russia's Financial Position

In yesterday's session, I hosted Alexandra Prokopenko of DGAP Berlin and Carnegie Russia Eurasia Center, and Alex Isakov of Bloomberg Economics to discuss the sustainability of Russia's financial trends. 

Financial Statements: What works and what doesn't in the EU bank resolution framework

In today's session, I hosted Dominique Laboureix, chair of the EU Single Resolution Board in Brussels, and Kathryn Judge of Columbia Law School to discuss ongoing developments in the way the EU deals with non-viable banks.