Meeting European Capital Markets Institute (ECMI) 31 March 2009, Brussels in presence of about 100 participants, concluded that on global level there is a huge gap between repairing reinforcement and reinforcement of financial stability. The European financial sector has transformed by the 2008 financial crisis and called into question the future prospects for Europe´s wholesale banking industry (see ECMI for the program). It was examined how the legislative and structural changes initiated by the crisis are affecting investment, capital flows and the overall competitiveness of Europe´s wholesale banking sector.

Discussed was how the crisis is changing the business model of wholesale banking, the implications of state-run banking for capital markets, the future of Europe´s financial market infrastructure, and how to re-establish the fund industry after last year´s dramatic capital outflows. At first an overview was given of how the financial crisis is affecting Europe´s wholesale banking market structure and the business model of banks. It adressed how de-leveraging and re-capitalisation will affect investments and capital markets development. G20 will be of great influence on recovery of the sector and economy. Markets and economies do not clearly mean revert. We learn most from pain, error and crisis. Markets can break, the world is not stable, liquidity is not free. Reduce reliance on markets, increase savings, hold more liquid assets.

Growth in exchange-traded funds (ETFs) has raised concerns over 3rd quarter 2011. The risk involved in the use of structured financial instruments by some of these funds in the form of total return swaps. The European Securities and Markets Authority (ESMA) recently held a consultation on ETFs and structured UCITS to gather evidence which should help it establish whether UCITS rules need fine-tuning to adapt to these vehicles. Crisis experience has shown that as the financial intermediation chain lengthens, it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds, which have become popular among investors seeking exposure to a diversified portfolio of assets, share this characteristic, especially when their returns are replicated using derivative products.

(click for slides 'State-controlled Banks)

Principle of state aid is it is cheaper than the market, because it is state competition like the free market. The optimistic view talks about development and growth, the sceptical view is political. State controlled banks: the challenges ahead. Why are governments investing in bank equities?:

• to provide additional core tier 1 capital

• governments must be prepaired to hold whatever proportion of equity capital turns out to be necessary

• due to beneficiaries

How to manage the shareholders? Safeguarding/promoting a competitive banking sector ('some banks may be too big to fail, but they are not too big to restructure'). Policy-makers, regulators and shareholders are best kept separate. Early exit of government shareholder is highly desirable, but how to return investment for the tax payer? Old wisdom for the new challenge. Why is the cost of this bubble so costly? After the internet-bubble not much happened.

PROSPECTS FOR EUROPE'S MARKET INFRASTRUCTURE

T2S (Target2-Securities) is a core component of Europe's future post trade infrastructure. Making Europe a better place to invest and trade in line with the Lisbon Agenda. Big wins: removal of Giovanni barriers -> harmonization. (click for slides 'Prospects for European Market Infrastructure'). Retail markets and wholesale markets splits. Impact of clearing on trading volumes.

RE-ESTABLISHING THE FUND MANAGEMENT INDUSTRY

There is a future for funds industry. (click for the slides 'Fundmanagement and Government', 'Re-establishing the Fund management industry ' and 'Funds Trends'). A half new financial system is to discuss. Reduction due to the crisis. Now we are in a Darwinian environment and we go back to basics. Regulatory framework for non UCITS* funds. Retail investors get access to dangerous assets. Keep sophisticated assets out of the regulated market. Retail investors are not ready (yet) for new assets. Introduce a Europe wide program for financial education, as tool to rebuilt trust in financial markets. What are the long term challenges and opportunities? Facilitating long term private savings and investment.

Regulatoring change should facilitate. Principle-agent is at the heart of governance problems. Agent with control. Principle has economic risk. Principles are not interested in monitoring , not willing to exercise control and they outsource investment decisions. Agent is loaded with conflict of interest. Related party transactions, multiple funds, fee structure and third party contracts (hard commissions and soft commissions).

The industry ignores integrity. Integrity is honouring your word, fundmanagers word. More transparency, cost structure, more rules on conduct (replace responsibility, erosion of real responsibility, moral wisdom dwindles, no room to learn from mistakes), cf art 14 revised UCITS directive. No trustee function in fund system. Have board with majority of independent non executive supervisory directors

THE PROSPECTS FOR EUROPEAN CAPITAL MARKETS AND EUROPE'S FINANCIAL CENTERS

The conference culminated with a dinner debate where executives from major European financial institutions discussed the future of European capital markets.