Europe has made some good progress in tackling this issue in recent years, in particular in harmonising the rules needed for the transparency and integrity of securities markets. Nonetheless, obstacles remain. One is legal uncertainty for cross-border holding and issuance of debt and equity securities – for example, different national definitions of securities ownership.7 Another is differences in national insolvency laws, which make it difficult for investors to properly evaluate the risks they assume when investing in securities in other jurisdictions. Still another is the transaction costs that investors face when engaging in cross-border securities trading due to divergent corporate governance and tax regimes.8 In other words, building a truly integrated capital market in Europe requires further efforts and new legislation extending far beyond Banking Union. It is essential that the progress we have made on the banking side does not cause us to lose reform momentum here. And this is not a case of politics directing markets; it is about policy creating the pre-conditions for markets function properly. Firm size The effects of location on access to finance are exacerbated by firm size. While firms are in general more credit-constrained in some jurisdictions than others, this phenomenon is particularly apparent for SMEs. For example, the percentage of financially constrained but viable SMEs – defined to be those with positive turnover in the last six months seeking a bank loan – varies from a minimum of 1% in Germany and Austria to a quarter of the total population in Spain and even a third in Portugal.
Fines for bad behavior drain resources that could be better used to expand access and improve services, but billions of dollars in avoidable penalties are just the start. The time spent handling a legal crisis is time not spent on more productive pursuits. Moreover, I worry that, in the long term, an industry that develops a reputation for dubious ethics will not attract the best talent.3 In contrast, a trustworthy financial services sector will be more productive and better able to support the economy. Reliable financial intermediaries can help increase the flow of credit, promote economic growth and make the financial system more stable. This is why restoring trustworthiness must be the ultimate goal of reforming culture. The industry’s shared norms—its culture—will not change by mere exhortation to the good, whether from me or from the industry’s CEOs. In my experience, people respond far more to incentives and clear accountability than to statements of virtues and values. The latter are worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences.4 What does it mean for a firm to profess to putting the customer first, if employees are compensated and promoted regardless of what’s good for customers? Or, worse, if they are not held to account for activities that can harm customers? If we focus on nothing else in today’s conference, let’s explore how best to structure incentives and reinforce accountability to align with core purposes and first principles.