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Presentation to Oireachtas Finance Committee by Brian Hayes MEP – Thursday 26th April 2018

Thank you Chairman, members of the Finance Committee for today’s engagement with the Irish MEPs. For my part, as a full member of ECOM – I’m glad to have the opportunity.

Can I also put on the  record my thanks to you Chairman in working with me to encourage the President of the ECB, Mario Draghi to attend this Committee. I very much hope that happens soon. I also welcome your recent invitation to the Chair of the SSM, Danièle Nouy, to speak before your Committee.

Frequently in Ireland we fail to appreciate the fundamental new role and new powers that exist for the ECB/SSM. Dealing with the 253 biggest banks in Europe – 4 of which are here in Ireland – the landscape from a regulatory and supervisory position has radically altered in recent years. That’s why it’s important that EU institutions are held accountable not just in the European Parliament, but also to member state parliaments.

I believe that the new EU-wide financial supervisory architecture – although not perfect – has helped to highlight the importance of the risk-based model. We live in an interconnected financial system. We live in a single monetary area. Reducing market fragmentation and reducing systemic threats to our economy represent for me at least, the new gold standard that we must attain. This is especially so in a small country that can be exposed, as we know all too painfully, to international shocks and also exposed because of its business model. Having a banking system that is fit for purpose and safe is in the interests of bank customers, the bank itself and obviously in the interest of EU member states.

The ECON Committee has become a central player in EU financial decision making, especially since the financial crisis that’s why it’s so crucial that we engage with you in an ongoing dialogue.

All of the major legislation that has come about since the crises – CRD4, MIFID, EMIR, Solvency II, to name but a few – have come through our Committee by way of co-decision making with the European Council. The progress made on Banking Union and the emerging progress on Capital Markets Union have the direct input of ECON. The committee’s engagement with all of the ESAs, also make our work Central in how financial services develop across the EU. The use of delegated powers by the ECON Committee is a growing feature of Parliament’s desire to scrutinise the decisions of all of the ESAs in secondary legislation.

For my own part, since my election to Parliament in 2014, I taken a lead role for my political group on the following files:

  • Money Market Funds Regulation,
  • The Institutional Occupation Retirement Provision (IORP2) Regulation,
  • the first report from Parliament on Fintech,
  • Pan European Personal Pension (PEPP),
  • Report on third county Equivalence.

Taxation of the Digital Economy

Taxation matters are still and always have been subject to a unanimous vote at the European Council. This means that Ireland on its own has the power to veto any piece of EU tax legislation and does not require the backing of any other Member State.

The European Parliament has limited powers in the area of taxation. It may make recommendations to Council but Council is under no obligation to adopt Parliament recommendations.

Taxing the digital economy is needed. The effective rate of tax of large scale digitals is below 10%. Digitalisation has moved at such rapid pace and naturally, there are aspects of the digital economy which are going untaxed.

But there are significant risks to the Commission’s approach to digital tax. The recent proposal in March proposes an interim solution which targets large tech firms and a comprehensive solution which is based on turnover, not profit.

First of all, targeting large US tech firms is not what is needed right now, at a time when trade disputes are surfacing all over the world. Secondly, a digital tax based on turnover deliberately benefits bigger countries because that is where the bigger populations are using services like Facebook, Google or Airbnb. Thirdly what’s digital and what’s not digital? Can it be argued that a German car manufacturer is a digital company – where possibly 30% or 40% of the value of the car is made up from Digitalisation? Also what does – this go it alone – approach say about the EU and inward investment into Europe.

My main concern is that moving ahead of the OECD on this issue creates the idea of an EU that appears to be unwilling to work at an international level to tackle the tax problem taxing the digital economy. The OECD BEPS (Base Erosion and Profit Shifting) process is working and in Ireland’s case has helped to double the tax take from corporates – from €4 billion to €8 billion in just four years.

Frankly there is no unanimous support for either CCCTB or a digital tax at the moment. If anything the opposition is growing. Recent comments by the new German Finance Minister, Olaf Scholz, also made it clear that he has questions about digital tax. Given the failure of FTT to make any difference under enhanced cooperation, I don’t believe that this route, favored by President Macron, could yield a different result. Do we all need to be engaged on this – absolutely yes. We need to be around the table and building up alliances in Council on both digital tax and on CCCTB.

Banking Union and NPLs

The last pillar of Banking Union regarding a European Deposit Insurance System must be completed. The question is how it is done as there are various Member States who still remain hostile to the proposal. The key principle should be that risk sharing and risk reduction policies are conducted in a phased way and go hand in hand with each other.

We cannot have a proper banking union without risk sharing, but equally we must ensure that all systemically important banks reduce their legacy risks from the crisis.

It is really important that we solve the NPL issue, across the entire EU. There will be a serious impact on lending to households and businesses if we don’t. Getting the lending/investment phase right for businesses and households is crucial. NPLs tie up capital which could be used for new lending. Banks with NPLs generally charge higher interest rates on new mortgages.

The ECB has recently published its guidance for banks on how they should deal with NPLs. The ECB’s policy is clearly focused on getting NPL reductions as quickly as possible. But equally, this needs to be consistent with consumer protection standards. It’s worth highlighting that from the ECBs perspective that the Irish Central Bank has responsibility for consumer protection – as its closest to the marketplace and best placed to update consumer rights, where needed.

There must be recognition for the work done by Irish banks in reducing NPL levels from crisis levels. The NPL ratio in Irish banks is around 13% now – this has been cut from 27% in 2013. The recent paper by the Central Bank highlights the fact that the NPL problem once represented €80 billion now it’s about €30 billion.

Clearly, big progress has been made on the commercial side of their balance sheet. On the retail mortgage side as we know more progress needs to happen across the banking sector, but especially in those institutions which are facing significant exposure.

Of course there must be a Europe-wide approach to this, but equally the EU must have regard to the legacy issues we have faced when it comes to the banking sector. Solving the problem of NPLs takes time and it would foolhardy to pretend that a one size fits all approach will work for all banks.

The question now is whether new powers above and beyond what’s in place will be proposed to tackle NPLs. No final decision has yet been made to move from criteria/guidelines to a more exacting standard for new lending.

What the ECB wants to see is more capital being provided for bad loans. Increasing provision for bad loans means less capital for new lending. Later this year, stress testing will take place across the banking sector. This will be another test for the Irish Banks as the NPL situation has progressively improved here in Ireland. If the ECB would accept split mortgages as performing loans – something I have called for most recently in a hearing with Madame Nouy – I think that would help. And I think there is a willingness to accommodate this.

MMF post 2020 impact on structural/cohesion funds

The next MMF will of course be a challenge as a consequence of brexit. A significant hole in the budget will have to be filled. Personally I believe that it would be a disaster for the EU to have a budget line that fails to meet our commitments. The budget is an important contribution in helping poorer regions and in creating the opportunity for poorer countries to develop economically and socially.

What the Taoiseach said in Strasbourg recently – a commitment to pay a bit more as a nett contributor country now – sent out a really positive message about this country. We have a track record over many years in demonstrating just how significant structural and cohesion funding can be.

Paying in more – gives us much greater power in designing MMF post 2020 and in arguing for special funding for Ireland – especially as a consequence of Brexit.

Next week we will see the Commission proposal and also see how the funding gap brought about by brexit can be plugged. It’s the start of a long process but we should never forget the importance of receipts – especially in the area of agriculture which represents about 80% for Ireland – and the difference it can make to rural Ireland.

In addition, we must demand that the the current PEACE and INTERREG programmes remain whatever happens with the post brexit

Brexit and Financial services

My central view on the financial services side of the Brexit negotiation is that punishing  the UK would be self-defeating for Ireland and the EU. I believe that above everything else there is a clear commitment across both sides of the channel that Brexit cannot become another financial threat or indeed that we roll back the advances made since the crash in reducing risk.

A no deal outcome – a hard Brexit – would present a new risk to the fragile and interconnected financial markets that exist in the UK and the EU. Britain is leaving the EU and the EU needs to establish after Brexit a solid new relationship with the UK especially in the area of financial services. Equally, the UK must show good faith in applying regulations that cannot be interpreted as a race to the bottom. Light touch regulation landed us with an appalling mess before and it cannot be allowed to happen again – in or out of the EU. The UK still has a job to do in convincing the EU that broadly its regulatory standards will not be reduced post-Brexit.

But can we genuinely regard the UK as just another third country? It’s financial system is intertwined with ours. The UK holds for 40% of Europe’s assets under management and 60% of its capital markets business, and UK-based banks provide more than £1.1 trillion of loans to the other EU Member States.

This means that European banks, SMEs and manufacturers could find it difficult and more costly to gain access to capital. What the UK offers is market scale and cost certainty.

Putting a wall up around UK financial services will be detrimental to Ireland especially. Over half of Ireland’s exports in financial services to Europe goes directly to the UK every year.

Ireland has serious opportunities to attract financial services firms in light of Brexit. However, we do not want to see a whole swath of the financial services industry pull out of the UK. We need a strong City of London as both of our financial services centres are interlinked.

I believe that the IDA has done a good job along with the government in making the case for Ireland. Dublin is a recognised financial centre has many cost advantages, especially in the area of funds and asset management.

The best outcome would be a broad-based, over-arching deal with a chapter dealing with Financial services. It cannot be passporting as the UK is leaving.

A stand alone arrangement on Equivalence, similar to other third country agreements that the EU negotiates would be a suboptimal outcome. It’s yet to be clear if the British option – a system of mutual recognition – could be possible on the EU side. Some have described the suggestion of “enhanced equivalence” as a possibility.

Much will depend on how disputes can be resolved in the future with an independent arbitration system acting between the ECJ on one side and some British entity on the other. I’m confident we can get a good outcome from this negotiation in relation to financial services.

My final appeal to everyone here – having spent a few years in both Dail and Seanad – is to work together for the sake of the country on brexit. This issue needs to be above party politics – too much is at stake no matter who is in government.


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