by The European Securities and Markets Authority (ESMA) is an independent European Union (EU) Authority that contributes to safeguarding the stability of the EU’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
ESMA achieves its objectives by:
- Assessing risks to investors, markets and financial stability;
- Completing a single rulebook for eu financial markets;
- Promoting supervisory convergence; and
- Directly supervising credit rating agencies, trade repositories and securitisation repositories.
Activities
ESMA achieves its mission and objectives through four activities:
- Assessing risks to investors, markets and financial stability;
- Completing a single rulebook for EU financial markets;
- Promoting supervisory convergence; and
- Directly supervising specific financial entities.
Assessing risks to investors, markets and financial stability
The purpose of assessing risks to investors, markets and financial stability is to spot emerging trends, risks and vulnerabilities, and where possible opportunities, in a timely fashion so that they can be acted upon. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection or the orderly functioning of financial markets.
ESMA’s risk assessments build on and complement risk assessments made by other European Supervisory Authorities (ESAs) and NCAs and contribute to the systemic work undertaken by the European Systemic Risk Board (ESRB), which focuses on stability risks in financial markets.
Internally, the output of the risk assessment function feeds into ESMA’s work on the single rulebook, supervisory convergence and the direct supervision of specific financial entities.
Externally, it promotes transparency and investor protection by making information available to investors via our public registries and databases and, where needed, by issuing warnings to investors. The risk analysis function closely monitors the benefits and risks of financial innovation in the EU.
Completing a single rulebook for EU financial markets
The purpose of completing a single rulebook for EU financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA contributes to strengthening the quality of the single rulebook for EU financial markets by developing Technical Standards and by providing advice to EU Institutions on legislative projects. This standard setting role was ESMA’s primary task in its development phase.
Promoting supervisory convergence
Supervisory convergence is the consistent implementation and application of the same rules using similar approaches across the 27 Member States. The purpose of promoting supervisory convergence is to ensure a level playing field of high-quality regulation and supervision without regulatory arbitrage or a race to the bottom between Member States. The consistent implementation and application of rules ensures the safety of the financial system, protects investors and ensures orderly markets. Supervisory convergence implies sharing best practices and realising efficiency gains for both the NCAs and the financial industry. This activity is performed in close cooperation with NCAs. ESMA’s position in the ESFS makes it qualified to conduct peer reviews, set up EU data reporting requirements, thematic studies and common work programs, draft opinions, guidelines and Q&As; but also build a close network that can share best practices and train supervisors. Following the ESA’s Review, ESMA will also identify two EU-wide strategic supervisory priorities that NCAs shall consider in their annual work programmes. ESMA actively supports international supervisory coordination.
Directly supervising specific financial entities
ESMA is the direct supervisor of specific financial entities:
- Credit Rating Agencies (CRAs)
- Securitisation repositories (SRs)
- Trade Repositories (TRs)
Eurobonds or stability bonds were proposed government bonds to be issued in euros jointly by the European Union’s 19 eurozone states. The idea was first raised by the Barroso European Commission in 2011 during the 2009–2012 European sovereign debt crisis. Eurobonds would be debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc altogether, which then forwards the money to individual governments. The proposal was floated again in 2020 as a potential response to the impacts of the COVID-19 pandemic in Europe, leading such debt issue to be dubbed “corona bonds”.
According to the European Commission proposal the introduction of eurobonds would create new means through which governments finance their debt, by offering safe and liquid investment opportunities. This “could potentially quickly alleviate the current sovereign debt crisis, as the high-yield Member States could benefit from the stronger creditworthiness of the low-yield Member States.” The effect would be immediate even if the introduction of eurobonds takes some time, since changed market expectations adapt instantly, resulting in lower average and marginal funding costs, particularly to those EU member states most hit by the financial crisis. The commission also believes that eurobonds could make the eurozone financial system more resilient to future adverse shocks and reinforce financial stability. Furthermore, they could reduce the vulnerability of banks in the eurozone to deteriorating credit ratings of individual member states by providing them with a source of more robust collateral. Setting a euro-area wide integrated bond market would offer a safe and liquid investment opportunity for savers and financial institutions that matches its US$ counterpart in terms of size and liquidity, which would also strengthen the position of the euro as an international reserve currency and foster a more balanced global financial system.
The governments of those states that most people would like to take over those debt risks do not think that this is a good idea and see other effects. They do not understand why they should help a group of states that have excessively borrowed and circumvented the EU contracts for many years should by making it easier for them to borrow more via Eurobonds. Germany is one of those sceptical states, together with Austria, Finland and the Netherlands.
Eurobonds have been suggested as a way to tackle the 2009–2012 European debt crisis as the indebted states could borrow new funds at better conditions as they are supported by the rating of the non-crisis states. Because Eurobonds would allow already highly indebted states access to cheaper credit thanks to the strength of other eurozone economies, they are controversial, and may suffer from the free rider problem. The proposal was generally favored by indebted governments such as Portugal, Greece, and Ireland, but encountered strong opposition, notably from Germany, the eurozone’s strongest economy. The plan ultimately never moved forward in face of German and Dutch opposition; the crisis was ultimately resolved by the ECB’s declaration in 2012 that it would do “whatever it takes” to stabilise the currency, rendering the Eurobond proposal moot.
European Commission proposal
On 21 November 2011 the European Commission suggested European bonds issued jointly by the 17 eurozone states as an effective way to tackle the financial crisis. On 23 November 2011 the Commission presented a Green Paper assessing the feasibility of common issuance of sovereign bonds among the EU member states of the eurozone. Sovereign issuance in the eurozone is currently conducted individually by each EU member states. The introduction of commonly issued eurobonds would mean a pooling of sovereign issuance among the member states and the sharing of associated revenue flows and debt-servicing costs.
On 29 November 2012, European Commission president Jose Manuel Barroso suggested to introduce Eurobonds step by step, first applying to short-term bonds, then two-year bonds, and later Eurobonds, based on a deeply integrated economic and fiscal governance framework.
Three approaches to eurobonds
The green paper lists three broad approaches for common issuance of eurobonds based on the degree of substitution of national issuance (full or partial) and the nature of the underlying guarantee (joint and several or several).
Full eurobonds with joint liability: This option suggests to fully replace the entire national issuance by eurobonds, each EU member being fully liable for the entire issuance. According to the European Commission “this would have strong potential positive effects on stability and integration. But at the same time, it would, by abolishing all market or interest rate pressure on Member States, pose a relatively high risk of moral hazard and it might need significant treaty changes.”
Partial eurobonds with joint liability: The second option would pool only a portion of borrowings, again guaranteed by all. This means EU member states would still partly issue national bonds to cover the share of their debts beyond a certain percentage of GDP not covered by eurobonds. The Commission does not state a specific volume or share of financing needs that would be covered by national bonds at the one hand and eurobonds on the other. However, the proposal is similar to that of the German Council of Economic Experts that proposed a European collective redemption fund, which would mutualise the debt in the eurozone above 60%, combined with a bold debt reduction scheme for those countries, which are not on life support from the European Financial Stability Facility. This option is expected to require an amendment of the TFEU treaty.
Partial eurobonds without joint guarantees: According to the third option that is similar to the blue bond proposal, eurobonds would again cover only parts of the debt (like option 2) but without joint guarantees. This could impose strict entry conditions for a smaller group of countries to pool some debt and allow for the removal of countries that do not meet their fiscal obligations. Due to “a mechanism to redistribute some of the funding advantages. between the higher- and lower-rated” governments, this option aims to minimise the risk of moral hazard for the conduct of economic and fiscal policies. Unlike the first two approaches, this would involve “several but not joint” government guarantees and could therefore be implemented relatively quickly without having to change EU treaties.
