Reaction to the Green Paper on the Long Term Financing of the European Economy

General remark This reaction to the Green Paper is a joint reaction of PMT Pensionfund for Metalworking and Mechanical Engineering, the Pensionfund for the Metal and Electrical Engineering Industries (PME) and their service provider MN. We endorse the reaction provided by the Pensioenfederatie, the organization representing Dutch pension funds. In this reaction we provide further explanations and highlights to the questions asked in the Green Paper.

Question 1: Do you agree with the analysis regarding the supply and characteristics of long-term financing? The analysis is limited to the supply side of long-term financing. For a complete analysis of the topic, a broader discussion that deals with both supply and demand and the interaction between these two would be useful. Also, a discussion of the different forms which long-term investments can take and the role of the financial sector in each of these forms would be very useful here instead of as a separate paragraph, because the characteristics of LTI are intertwined with the provision of long-term financing.

Question 2: Do you have a view on the most appropriate definition of long-term financing? Long-term financing is a very broad topic, which encompasses many different types of investment and financing. Just to name a few, both direct and indirect loans, equity financing, alternative investments and securitized loans. But, taking a different perspective, it also encompasses private savings at banks, pension and insurance savings, public investment and public-private cooperation. Opinions on what exactly ‘long-term’ means differ based on the perspective that is taken in coming up with a definition, where multiple perspectives can be equally valid. Since there is such a diverse landscape of products and maturities, using a broad definition that encompasses most of this landscape seems the logical way to go. Having said that, the most appropriate definition of long-term financing also depends on the specific intentions one has. In subsequent stages, clearly defining ‘subgroups’ of long-term investment for specific initiatives might be useful.

Question 3: Given the evolving nature of the banking sector, going forward, what role do you see for banks in the channeling of financing to long-term investments? As the analysis in the Green paper indicates, banks have been hit by the financial crisis and are now in a process of deleveraging and preparing for new prudential rules for banks, which decreases the ability of banks to provide long-term financing. However, at their core, banks are institutions that have been designed to provide the maturity transformation of short-term savings (deposits) into long-term investments (predominantly loans).

This role is supported by departments that have specialized knowledge and information systems to know and assess the credit risk of both existing loans and new loans issued. The maturity transformation that they have been engaged in historically will remain one of the core elements of banking in the coming years, based on the specialized knowledge and skills that banks have in managing credit risk. Therefore, banks will remain one of the most important (if not the most important channel) for long-term financing. Other types of investors usually only have limited expertise to take on this role of providing direct long-term financing and will have to engage in other forms of long-term financing, such as investing in traded financial instruments that provide long-term investment opportunities. In short, this means banks will remain an important part of the provision of long-term financing in the future and will still provide their historical role in the maturity transformation process between short-term savings and long-term investment.

Question 4: How could the role of national and multilateral development banks best support the financing of long-term investment? Is there scope for greater coordination between these banks in the pursuit of EU policy goals? How could financial instruments under the EU budget better support the financing of long-term investment in sustainable growth? National and multilateral development banks are particularly well suited to provide direct long-term financing of (semi-) public long-term investment projects, and to projects that fail to attract financing from private sources due to market failure (such as a liquidity squeeze due to the illiquid nature of the project) or ‘incorrect’ pricing in case of positive externalities. Their role could be increased by attracting more private funds to co-finance their projects, and thus further increase both the amount of projects invested in and the scale of these projects. The ability to attract more private funds depends on the attractiveness of the project proposals of development banks. The closer the risk/return profile of co-investments through development banks is to the risk/return profile of other competing investments, the more private investments can be channeled through development bank projects.

Question 5: Are there other public policy tools and frameworks that can support the financing of long-term investment? One tool that comes to mind when thinking of long-term investment is public-private cooperation in especially infrastructure investment. In these type of projects, private parties pay for the initial investment, and the government takes care of the subsequent annual returns to the investing parties. Obviously, an important precondition for public-private cooperation to work is that the return profile should be such that private parties are willing to invest.

Question 6: To what extent and how can institutional investors play a greater role in the changing landscape of long-term financing? Pension funds are one of the intermediaries that link capital providers to the capital borrowers in the economy. To finance the long term liabilities that they have, pension funds are looking to earn returns based on either growth of the entire economy (equity) or by earning a premium for credit

and liquidity risk (bonds and direct finance). In principle, this objective allows pension funds to contribute to stimulating to long-term investment by allocating funds to projects that support or enhance the productive capacity of the European economy. This allocation can be done to the extent that the defined long-term investment allocation is in line with the pension objective (real or nominal) and within the risk constrains that they can tolerate. Most of the long-term investment projects we have seen in the green paper consist of two components: a project financing part and a project implementation part. Pension funds are suitable partners for the financing part. The project implementation part however is not the core business of pension funds. Therefore, we believe a suitable partner should be found for the implementation part of the described projects. The intrinsic risks of a project could be split between all participating partners, so as to provide the right incentives for each partner to deliver on their respective responsibilities. In order for a project to be eligible for the investment portfolio of pension funds, it has to satisfy some conditions.

1. A Long Term Investment should contribute to reaching the pension fund objectives and will have to compete with other investment opportunities available to the pension fund. The project could for example have higher return to risk ratios, give better matching to the liabilities with for example via inflation linked cash flows or provide diversification benefits during certain risk environments.

2. If the financing is done via one-project-one-financier, the financing becomes unnecessarily risky because of concentration risk. Financing is much more attractive if a number of projects is pooled and the risk of the pooled projects can subsequently be shared between a number of financiers.

3. Since the projects in the green paper are mostly illiquid in nature, the return on the investments need to be high enough to include a illiquidity premium for the investment to be competitive with other investment projects.

4. Long Term Investment mostly involves relatively new investment products/projects and are smaller in terms of required funds than many other investment categories. For the investment to be interesting enough for pension funds, there needs to be a large enough choice of similar investments (universe) with each a large enough investment opportunity (funds required by the investment).

5. The bidding process for a Long Term Investment project should not be too long, too costly and should be transparent from beginning to the end.

6. The Long Term Investment projects should give the financier sufficient insight into the risks of the projects, including those of ESG. Transparency and a good understanding of the risks involved in the project is one of the most deciding characteristics of an investment opportunity nowadays.

Regarding the sixth point mentioned above, environmental, social and governance factors should be fully integrated in the investment analysis and decision making process,. The responsible investment policy is made operational in four ways by Dutch pension funds: integration in the investment processes; thematic investment, exclusion policy and active ownership. With respect to active ownership, clear targets are set that we wish to achieve in having a dialogue with the companies that we invest in. We are transparent about our dialogues but do not seek media attention to force companies to change (no activist approach). Often these dialogues involve joint initiatives with other investors, focusing on sectors, countries, specific topics (such as CO2 emissions) or governments and other regulatory bodies. In taking on the role as intermediaries to contribute to the long-term investment, pension funds need to balance the returns and risks that come with these investments. Apart from contributing to

the productive capacity of the economy, which we believe is a good for both investors and non-investors, greater allocation to long-term investments should be in line with the risk profile of the fund. Moreover, the pension fund is bound to follow national and international guidelines, laws and regulations and invest according to the pension benefit objective that the fund has. Overall we believe that Long Term Investment could prove to be a successful and growing asset class when the suggestions we made above can be addressed.

Question 7: How can prudential objectives and the desire to support long-term financing best be balanced in the design and implementation of the respective prudential rules for insurers, reinsurers and pension funds, such as IORPS? Long term financing is attractive to institutional investors when the risk premium on long term lending is proportional to the amount of risk taken. This is a fundamental point: no matter what the prudential regulations are, if long term financing offers an inferior risk premium compared to other investment opportunities, the potential for increasing long term financing is limited. Second, mark-to-market based prudential supervisory rules may impede long term investment when intrinsically the long term investment is an attractive portfolio choice. Specifically, this situation arises in the case of long term assets that have a regular cash flow pattern and which are in the portfolio to be held to maturity. Market prices (or mark-to-model prices) of these assets may fluctuate substantially, which may trigger a sale if the price of the asset drops too much, to protect the funding ratio of the pension fund. Unfortunately, this may occur to assets that the pension fund invested in based on the cash flow profile, and which the pension fund would have preferred to keep in the portfolio. In these cases, valuation of these assets causes changes in the investment portfolio that are not driven by the intrinsic properties of the assets, but by quickly changing market circumstances. A modified form of valuation for these assets could mitigate this effect. One example could be to introduce the ‘amortized cost accounting’ principles from the IFRS accounting rules for the part of the asset portfolio that is classified as ‘hold-to-maturity’. From the point of view of responsible investment, many institutional investors pursue a policy of engaged shareholdership. This means that institutional investors do not only invest in equity for the financial return equity provides, but also take their social responsibilities by taking an active stance in influencing the policy of corporations in which they hold shares. Concentrating the equity portfolio would make it easier and more effective for institutional investors to pursue this policy. However, the current risk models from modern prudential rules discourage concentrating and reward diversifying the equity portfolio. Institutional investors also try to cooperate to be more efficient and effective in their engagement policy. However, in some countries it is not entirely clear to many institutional investors how the ‘acting in concert’ regulations that their supervisor imposes should be interpreted. Clearing up these regulations would stimulate the effectiveness of engagement policies by institutional investors.

Question 8: What are the barriers to creating pooled investment vehicles? Could platforms be developed at the EU level?

Pooled investment vehicles are in principle a very useful venue to channel funds into long term financing. There are several important issues for creating or investing through pooled investment vehicles. These issues are:

- Does investing through pooled vehicles bring enough benefits to justify the additional costs of investing indirectly?

- What will the tax treatment of the pool and its participants be in the various countries - How are the redemption provisions drafted - The ‘one solution fits all’ property - How is the governance of the vehicles arranged?

with regard to redemption provisions, even though the intention is to invest for a longer term, unexpected circumstances can occur that force an investor to redeem its investment (partially or in whole). Especially in an illiquid fund, it is then important to know whether or not an interim redemption, if necessary, is restricted and if so, what the restrictions are. The ‘one solution fits all’ property of pooled investment vehicles, means that institutional investors are limiting themselves in their investment options. Every institutional investor has his own point of view and desires with regard to preferred size, type and credit risk of long term financing. These different preferences cannot all be catered to through a pooled investment vehicle, since the investment vehicle will have to work based on standardized units. The governance of these pooled investment vehicles is important for long-term investors. Who is ultimately responsible for the investment decisions the fund makes, and how much influence do individual investors have? This can be especially problematic in investment vehicles where a large number of investors participates, thus reducing the influence on investment decisions each of them has. The EU level If a pooled investment vehicle is structured at the EU level, attention should be paid to the tax treatment of such a fund. Under Dutch tax law the tax provisions are designed in such a way that the tax burden is the same for the situation of a direct investment by the investor, an investment via a tax transparent fund or an investment via an opaque fund. If the tax burden is much higher when using a pooled investment vehicle, the use of such fund will not be interesting for investors. The most important condition for pooled investment vehicles to become a success is that investors do not only pool money, but also knowledge. By pooling existing knowledge, institutional investors may profit from each other’s expertise in different areas so that all of them stand to gain from a pooled investment vehicle. This does probably limit the scope of the pooled investments to local level rather than EU level, since pooling knowledge is much easier to bring about in a cooperation where the parties involved already know each other.

Question 9: What other options and instruments could be considered to enhance the capacity of banks and institutional investors to channel long-term finance? In order to mobilize the long-term financing capabilities of institutional investors, it is essential that general trust in the banking sector is restored as soon as possible. Banks are the only intermediaries that possess sufficiently developed credit and monitoring departments, without which it is almost impossible to do a proper selection for extending long-term loans, and to monitor these loans effectively during their lifespan. Thus, coordination under appropriate financial terms between

banks and institutional investors could enhance the possibilities of extending long-term financing to the European economy in a responsible and productive way, provided that .

Question 10: Are there any cumulative impacts of current and planned prudential reforms on the level and cyclicality of aggregate long-term investment and how significant are they? How could any impact be best addressed? In the last few years, a substantial number of regulations and directives aimed at financial markets has been drafted and in some cases already implemented after initiatives of the European Commission. The regulations and directives generally aim to reduce perceived risk and provide more transparency. Long-term investment itself is especially impacted by overly penalizing prudential and valuation rules. If capital requirements are too high, or the risk of high short-term volatility significantly impacting the year-to-year results of institutional investors becomes too large, then investments in long-term assets will be reduced. There is a link with cyclicality here as well. Since prices of long-term assets tend to decrease more than those of short term assets in a bust, prudential and especially valuation rules provide an incentive to move out of long term assets in an economic downturn. A way to circumvent this issue would be to move to smoothed valuation of long term assets. This will mitigate the pro-cyclical impact of current valuation rules, and might make investing in long-term assets more attractive. Another aspect of prudential reforms is the administrative burden that comes with it. Most prudential reforms come with significant costs in the form of higher administrative burdens. It is not always clear whether an analysis of the costs and benefits has been done for each new regulation or directive. A prudential reform that provides minor improvements for governance, risk management, transparency or communication requirements but that imposes a substantial administrative burden, or adds to the existing administrative burden caused by other regulations may not always be the best choice. An increased administrative burden may reduce the scope for long-term investments and provide an incentive to invest in liquid short term assets with low costs to reduce the overall costs for the institutional investor. One way to gain insight whether this is happening or not is to assess not only the impact of the proposed reform itself, but of the total administrative burden of existing and new regulation when a reform is proposed.

Question 11: How could capital market financing of long-term investment be improved in Europe? Removing fragmentation in the European capital markets and leveraging member-state procurement budgets would be a first step in channelling in a more efficient way long term finance. Another barrier to tackle is to reduce the home bias and support cross border investments. A second step would be to support innovation and specifically new enterprises which have the potential to become the new stars and be the engine of economic growth in the coming years. Supporting them would free up capital from relatively small (but important from a chain perspective) parties such as family households, boutiques investment firms and venture capital companies or funds.

From a credit point of view, traditionally banks have provided the vast majority of the funding for non-listed companies in Europe. To accommodate a move towards a model where more (especially long-term) funding flows through capital markets, standard documentation on the part of bonds-issuing party would greatly help in providing insight into the relevant data to assess the risk associated with the bond. Moreover, the costs and complexity of complying with regulation demands keeps many small companies out of the capital market. Decreasing this burden would increase the potential capital market funding for smaller companies. Finally, international regulatory bodies should carefully consider the cumulative impact of new regulations affecting banks and other financial institutions, as these may have unintended consequences on both the micro and the macro level.

Question 12: How can capital markets help fill the equity gap in Europe? There are multiple ways to approach this issue, either through measures impacting directly on the equity provision to companies, or through indirect measures such as for example securitisation. One route that would help would be to decrease the costs of trading equity, thus making it more interesting for investors to provide equity to firms, which can then be traded away easier if desired. This would also make subordinated loans a more interesting form of finance, both on the part of the companies and on the part of investors. Second, efforts should be undertaken to re-establish the trust between market agents and supervisors with respect to securitization. One way to achieve this is by developing products that are based on clear and comprehensible structures (no complex derivatives) with low-risk underlying assets. The securitization markets are a key source for long term funding. Private sector parties should work closely with EIB or EIF in developing a liquid (corporate) bond market. If equity, as perceived by many, is a better financing instrument than bonds, then the capital market should be able to find a right price for equity versus bond financing. To the extent that the equity gap is caused by non-fundamental different treatment in regulations, these regulations should be adjusted. What should change in the way market-based intermediation operates to ensure that the financing can better flow to long-term investments, better support the financing of long-term investment in economically-, socially- and environmentally-sustainable growth and ensuring adequate protection for investors and consumers? One of the problems is that long-term markets are currently not very large, and thus not very liquid. The government can play a role by enlarging this market - and thus improving liquidity - by developing accommodating policies such as willingness to take first losses and providing partial guarantees.

Question 13: What are the pros and cons of developing a more harmonized framework for covered bonds? What elements could compose this framework? First, we would like to remark that we believe that the potential for increasing the covered bond markets is limited. Issuing a covered bond for a bank forces the bank to use some of their assets as collateral, which cannot be done indefinitely without deteriorating the financial position of the bank excluding the collateralized assets.

Having said so, a harmonized framework could increase the investment appetite for covered bonds. Currently covered bond markets are fragmented along national lines due to differences between local markets with respect to various fields of law governing these instruments (e.g. bankruptcy and property law). A harmonized market for covered bonds has the potential to reduce the required capacity needed to fully assess the relevant characteristics of each individual covered bond market in order to become comfortable to invest in the relevant covered bond. The harmonized framework could attract new investors and increase the appetite of investors that currently already invest in certain covered bonds markets. At the same time a harmonized framework has the potential to increase the appetite to issue covered bonds for by issuers. This increased investors base, combined with an increased issuer base, will result in an increased liquidity in a single European covered bond market. On the other hand, covered bonds are issued by banks who each have their own policies and remain in control of the composition of the security provided and monitoring and collection of the cash flows. We are not sure if harmonization will reach far enough to enable potential investors, supervisors and rating agencies to evaluate and compare individual covered bonds on a uniform basis. Lastly, in order for the harmonized framework to become a success the differences in local law between the various EU member states should be overcome, which may be a challenge.

Question 14: How could the securitization market in the EU be revived in order to achieve the right balance between financial stability and the need to improve maturity transformation by the financial system? See the answer to question 12 for some suggestions on securitisation, replicated here: Efforts should be undertaken to re-establish the trust between market agents and supervisors with respect to securitization. One way to achieve this is by developing products that are based on clear and comprehensible structures (no complex derivatives) with low-risk underlying assets. The securitization markets are a key source for long term funding. Private sector parties should work closely with EIB or EIF in developing a liquid (corporate) bond market.

Question 15: What are the merits of the various models for a specific savings account available within the EU level? Could an EU model be designed? To assess the merits of saving accounts at the EU level, it would be good to more clearly define what the purpose and the role of an EU level savings account is. Currently, in the Netherlands there is no lack of opportunities for long-term savings through pension funds and financial institutions such as insurers, so the added value of an EU-level savings account is not clear from a Dutch perspective at the moment.

Question 16 – Question 18: No comments on these questions.

Question 19: Would deeper tax coordination in the EU support the financing of long-term investment?

It is important that throughout the EU the tax treatment of pooling vehicles (when is it transparent, when not) is clear and national tax qualifications are followed if possible (i.e. if the tax treatment is transparent for tax purposes in the home country, then it should also be so in other EU countries).

Question 20: To what extent do you consider that the use of fair value accounting principles has led to short-termism in investor behavior? What alternatives or other ways to compensate for such effects could be suggested? Fair value accounting, the frequent reporting requirements and the potential supervisory reactions triggered by the reported financial situation that all go together have certainly had an impact on investment behavior. More specifically, long-term investors would sometimes like to ignore rapidly changing market values that are not driven by fundamentals, but cannot afford to do so because this would violate the short-term financial constraints posed by the supervisory framework based on fair value accounting. To prevent hitting the short-term constraints, long-term investors are often forced to move with the herd (or preferably to move slightly in front of the herd) to prevent taking big losses on paper. Unfortunately this can force them to accept moderate realized losses and may reinforce market volatility as long-term investors sell when others are selling and buy when other parties are also buying.

Question 21: What kind of incentives could help promote better long-term shareholder engagement?

It is useful to emphasize that for many institutional investors shareholder engagement is important,

but that shares form only a limited part of the total portfolio. Bonds usually are a far more important

part of the portfolio. Aligning interest for long-term bonds issuers and investors could be done by

transparency about the risks of the company through standard documentation.

As to shares, from an investors point of view long term shareholders engagement starts with

confidence in the long term strategy of the company. The way the board will be able to implement

the strategy and the frequency of communicating about the strategy to investors is crucial. Next to

that, the non executive board should supervise the executive board in relation to the long term

strategy. Long term shareholder engagement will improve if shareholders are involved with the

company. Communication, transparency and respect for shareholders rights can contribute to long

term shareholders engagement.

Current suggestions of a loyalty dividend or the introduction of special voting rights for long-term

shareholders are not preferred instruments. They reward investors that are simply investing in a

stock because it is in an index. These investors have no real interest in following the company or

being engaged. If the stock falls out of the index, they will sell the shares.

Question 22: How can the mandates and incentives given to asset managers be developed to support long-term investment strategies and relationships?

Whether or not an asset owner wants to set up long-term investment strategies in any asset class, is

up to investment beliefs, risk appetite, regulatory environment and the shorter or longer term goals

of the investments. Once it is decided that a long-term investment strategy is to be rewarded an

asset manager should be selected that has an active long-term focused investment policy.

Characteristics to look for are:

an investment process and philosophy with clear long term characteristics (incl ESG

integration),

low turnover in the portfolio, a good track record over the long term (5-10 years).

Mandates should be structured to reflect these characteristics. In monitoring the performance of the

asset manager most attention should be paid to the team, the process and the resulting portfolio as

well as the long term performance. Short term performance has to be explainable, turnover should

be low and the asset manager should stick to its long term process. The asset manager in its turn

should put up incentive structures to promote long term investments and set long term performance

targets besides shorter term targets.

Supervisory rules play an important role as well. Too much focus on risk and publishing of quarterly

or yearly performance indicators of asset owners can lead to suboptimal and counterproductive

investment decisions. De-risking when low risks assets are very expensive and re-risking when risky

assets are becoming expensive is an often seen pitfall and exacerbates the markets over- and under

reaction to short term news flow. Furthermore too great a focus on costs can also be detrimental for

active and engaged investment strategies. Researching companies well and being an engaged

shareholder is a time consuming and labour intensive profession. It simply costs more than following

an index.

Question 23: Is there a need to revisit the definition of fiduciary duty in the context of long-term financing?

The public discussion seems to focus on long term financing in relation to how shareholders can be

committed to companies for a long(er) period. This discussion is often started from a view that long

term shareholders can create a solid shareholders basis to a company. However whether or not long-

term investing is in the best interest of the clients, (the asset owners), depends on many factors

including the asset category and risk-appetite of the client. Therefore the investment decision on

short, medium and long-term investing should be up to the asset owner and should be left outside

any EU recommendations or EU regulation.

Furthermore a long term investment strategy does not automatically mean that an investor is a long

term shareholder in a company. In our view a long term investors should be considered as active

investors that are committed to use their shareholders rights and enters in dialogue with companies

to create shareholders value in the long term.

Asset managers of pension funds have a (fiduciary) duty to their clients to create value (in the long

term). Holding shares in a company for a long term could be in conflict with their fiduciary duty if the

shares in a company should be sold in order to create value for the portfolio.

Next to the conflict with the fiduciary duty, mandates given to asset managers mostly short or

medium term. By definition this introduces a shorter-term perspective into investment, unless a

long-term investor decides to completely circumvent external asset managers and to manage all

assets internally. However, this may require a very substantial initial investment in knowledge, skills

and infrastructure that the investor is unwilling or unable to afford.

Question 24: To what extent can increased integration of financial and non-financial information help provide a clearer overview of a company’s long-term performance, and contribute to better investment decision-making?

Integration of non financial information in the investment decision making process is crucial. Non

financial information can help to understand the risk reward characteristic of a company as

environmental-, social-, and governance factors can be of influence to the risk return profile of a

company.

If sustainability and CSR related information would be integrated into the company’s annual

reporting this would greatly contribute to helping Socially Responsible Investing move towards

mainstream investing. Currently ESG specialists in the Responsible Investment teams at asset owners

analyse different data than their front-office colleagues and hold different engagement meetings

with issuers. Integrated reporting would help move forward the ESG integration into investment

decision-making and would make it easier to assess the company’s ESG-related risks.

Question 25: Is there a need to develop specific long-term benchmarks?

From a practical point of view it is very hard to come up with a long-term benchmark. However,

having such a long-term benchmark would be useful in writing longer-term contracts with external

asset managers and would have a definite added value.

Having said so, as long as the asset management contracts and incentives are determined well and

the monitoring of the asset owner by the regulator and the asset manager by the asset owner is

done accordingly, there is no need for long-term benchmarks in our view.

Question 26: What further steps could be envisaged, in terms of EU regulation or other reforms, to facilitate SME access to alternative sources of finance? By definition, SMEs are small scale firms that are dependent more on local/national regulation than on EU regulation. Whether or not SMEs can access alternative sources of finance is and will remain a regional issue first and foremost. As discussed in the Green Paper, one of the problems for many SMEs in obtaining funding is that the new capital and liquidity requirements in Basel III force banks to extend less loans, decreasing the available funding through banks for SMEs. However, the real problem is the following: a substantial fraction of SMEs is not or less able to get loans anymore, even if banks could afford to extend it. This is caused by a balance sheet with company specific assets, which the company values highly but the bank values much less. What many SMEs therefore could use to access more loans is to strengthen their own funds, which in turn will enable them to obtain bank and non-bank finance more easily. This critical point should be kept in mind when trying to design solutions for SME funding. Finally, reporting requirements for SMEs are very strict and frequent. This fosters transparency, but comes at a cost and time investment that is disproportionate for many SMEs. Reducing the reporting requirements may well improve the financial situation of SMEs directly (by decreasing costs) and indirectly (by freeing up more time for productive activities on the part of the SME).

Question 27: How could securitisation instruments for SMEs be designed? What are the best ways to use securitisation in order to mobilise financial intermediaries’ capital for additional lending/investments to SMEs? Currently many local and national exchanges are working on the implementation of a separate platform of SME financing. This is not always done through securitisation, many of these platforms bring together multiple investors that invest directly in SME’s. The answer to this question could best be discussed with the parties involved in those platforms.

Question 28: Would there be merit in creating a fully separate and distinct approach for SME markets? How and by whom could a market be developed for SMEs, including for securitised products specifically designed for SMEs’ financing needs? It is possible to develop a separate SME market, and doing so may alleviate part of the funding problems of SMEs. As mentioned in the answer to question 27, platforms to invest in SMEs may either organise investments in SMEs directly or do this through securitisation. Since SMEs operate locally, such a SME market can best be organised through local exchanges. Many country exchanges already have such a platform or are developing one. These initiatives could be further stimulated by partnerships of institutional investors and banks, where the institutional investors help banks in the funding (and so a reduction of capital requirements) in return for an appropriate compensation. However, different market participants have different perceptions of what ‘appropriate’ is, which is a serious obstacle to such partnerships.

Question 29: Would an EU regulatory framework help or hinder the development of this alternative non-bank sources of finance for SMEs? What help could support their continued growth? This is a very hard question to answer. It is obvious that the existing local initiatives to facilitate and stimulate credit extension to SMEs through the channels mentioned in the previous questions have developed without any EU regulation. This leads to the conclusion that an EU regulatory framework is not necessary to develop alternative sources of finance for SMEs. Also, since most SMEs work locally, a local approach to the financing of these companies seems a fruitful approach, since monitoring and risk management are easier and less costly on a local level. This indicates that the local exchange growth that we are currently seeing will expand much further in the near future. What would really support continued growth of alternative funding sources for SMEs would be a strengthening of own funds on the part of many SMEs themselves, which would increase their creditworthiness and would make them a more attractive debtor for all providers of funding. What would really help in that respect is sustained economic growth in the EU.

Question 30: In addition to the analysis and potential measures set out in this Green Paper, what else could contribute to the long-term financing of the European economy?

Many forms of long-term finance have been mentioned in the Green Paper. The single most important point to foster the long-term financing market remains a positive economic climate with a proper, but not excessive focus on risks. Any measure that stimulates economic conditions can therefore be considered as stimulating long-term financing and growth.