The Institute of International Finance (IIF) on 7 March provided feedback to the European Commission’s Call for Evidence on creating a European Savings and Investments Union (SIU). The creation of SIU, including banking and capital markets, builds on the previous achievements of Capital Markets Union (CMU) and the Banking Union. In the letter, the IIF supports the initiative and writes that if done successfully, the SIU could help leverage the wealth of European savers, release much needed capital for innovation and digital transformation, ensure the competitiveness of the European financial sector, harness sustainable finance, and help reduce barriers and fragmentation across and within the Single Market.

These are all important and much needed policy objectives that the IIF strongly supports. The IIF has long advocated to policymakers and standard setters the importance of reducing and minimizing the fragilities, inefficiencies and instabilities that are inherent when financial markets are fragmented. Fragmentation can trap capital, liquidity, and risk in local markets, making these resources unavailable where potentially most needed; create significant financial and operational inefficiencies, resulting in additional unnecessary costs to end-users; and reduce the capacity of banks and other financial institutions to serve both domestic and international customers.

The new impetus towards the SIU requires solid foundations to overcome the European market fragmentation. It is important to recognize the role of the banking sector in Europe and the need for well-calibrated prudential regulation to complement and support the development of capital markets, which continue to be underdeveloped and strongly fragmented across national lines. We therefore propose a thorough review of existing regulations to eliminate redundancies and inconsistencies that hinder market efficiency, as already positively started via the Omnibus initiative. This includes aligning regulations with the objectives of the EU Green Deal and Sustainable Finance initiatives. A more cohesive regulatory framework would facilitate smoother operations for financial institutions and enhance overall market liquidity.

A successful SIU can also help enable the Commission’s Competitiveness Compass initiative aimed at setting a path for Europe to become the place where future technologies, services, and clean products are invented, manufactured, and brought to market, while being the first continent to become climate neutral. As banks continue to provide the traditionally principal source of financing, it is urgent to address regulatory inefficiencies that have become obstacles to adequate financing of the economy. In particular, facilitating the efficiency of liquidity and capital within banking groups at consolidated level by restricting pre-positioning inside the EU/eurozone will enable adequate circulation of capital and liquidity. The present prudential framework provides for capital and liquidity waivers across EU jurisdictional boundaries, but Member States opt not to apply them – notwithstanding the Single Supervisory Mechanism (SSM). There is also a need for greater harmonization and cooperation between the SSM and the national competent authorities. Without the necessary changes, the attractiveness of cross-border banking and consolidation in Europe will remain constrained, undermining broader objectives of financial integration and economic growth in the EU.