Against the backdrop of climate change and digitalization, researchers at the Leibniz Institute for Financial Research SAFE emphasize that green finance and financial stability must be on the agenda for the next German government after the 2021 federal elections. In addition, there is the completion of the banking union and the creation of a capital markets union in Europe, particularly to create sustainable standards for retirement provision. A current SAFE Policy Letter summarizes these points in detail.
“From the perspective of our institute's mission, a sustainable architecture for financial markets in Europe, we see an urgent need for action in safeguarding global commons such as the climate and in transforming our financial system,” says SAFE Director Jan Pieter Krahnen. According to the SAFE Policy Letter, which Krahnen and other researchers at SAFE conducted, concrete starting points include regulatory and financial market policy measures. For example, previous content of green financial policy would target the investment decisions of private households, investment firms, and insurance companies, but would come to nothing in the process. “The goal should be comprehensive transparency in the climate-ecological contributions of individual companies or products so that people can base their consumption and investment behavior on this,” Krahnen adds.
Using European projects such as the Capital Markets Union for retirement planning
In addition, the SAFE team believes that the process of change toward an increasingly digitally-driven financial system must be managed by legislation and supervision to tackle future crises better. It is also important when to apply which regulations to innovations such as digital private and central bank currencies. "In a new financial system, banks may no longer be the most important players. Trading companies or web-based platforms can also take on this role," Krahnen explains.
In this context, a common European financial system can only emerge if the banking union project is completed, the SAFE policy letter states. In terms of financial stability, a completed banking union would not only enable the restructuring of national debts. It would also minimize the concentration risks of sovereign bonds in commercial banks’ portfolios, which could break the “doom loop” of financial institutions and sovereigns.
“A similar political effort is necessary for the creation of a European capital market,” the SAFE researchers write further. Accordingly, a component of such an integrated capital market is a common European securities market supervision. Finally, a capital market union in Europe would also contribute to the German pension system. “Both the realignment of state-subsidized pension provision and the amendment of the statutory pension can benefit from a European capital market,” explains Jan Krahnen. This would be particularly true if the pay-as-you-go financing of pension insurance were supplemented by an automatic equity pension.
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