Tuesday, March 10, 2015

European Capital Markets Union – A landmark project to unlock funding for Europe's businesses?

A few weeks ago, the European Commission has presented a project of a European Capital Markets Union. Will this be a next step in the never ending transformation of the finance industry since the 2008/09 crisis?

Where we stand today

The current environment is tough for businesses that remain heavily reliant on banks and relatively less on capital markets.”

Beyond over-reliance on bank funding, the Commission says that seeking financing in another EU member state is difficult, due to legal and supervisory barriers.

Where we want to go

Europe’s main problem today is the lack of economic growth. As investment can trigger growth, the Commission intends to unlock investment, both in European companies and infrastructure. Amplifying investment in Europe necessarily implies enhancing cross-border investments. At this point, we reach the key topic of the Commission’s initiative, the creation of a true single market for capital in Europe.

The direction we need to take is clear: to build a single market for capital from the bottom up, identifying barriers and knocking them down one by one. Capital Markets Union is about unlocking liquidity that is abundant, but currently frozen, and putting it to work in support of Europe's businesses, and particularly SMEs.”
Jonathan Hill – EU Commissioner

More specifically, the Commission intends to focus on

  • reducing the cost of capital, especially for SMEs;
  • improving access to finance for all businesses (especially SMEs) and infrastructure projects across Europe;
  • creating a single market for capital by removing barriers to cross-border investments;
  • diversifying the funding of the economy;
  • boosting the flow of institutional and retail investment into capital market instruments;

Why it is difficult to get there

Four impediments can prevent the occurrence of a European Capital Markets Union:

  • Compared to bank lending, financing through capital markets is relatively underdeveloped in Europe.
  • Investors lack confidence in European capital markets.
  • Access to capital markets differs greatly across firms and across member states.
  • European equity markets remain characterized by a home bias, meaning that potential risks and rewards are not shared across borders.

How we can get there

At first glance, this sounds pretty easy:

“In essence, our task is to find ways of linking investors and savers with growth.”

More specific initiatives include

  • encouraging simple, transparent, and high quality securitization to free up bank balance sheets to lend;
  • simplifying the European prospectus directive;
  • improving the availability of credit information on SMEs, (for example through a common credit scoring and simplified accounting standards other than IFRS);
  • developing a pan European private placement regime (standardized insolvency laws, issue processes, documentation, and information on the credit worthiness of issuers);
  • supporting new European long term investment funds and enhancing the transparency of European infrastructure projects;
  • harmonizing market infrastructures in Europe through aligning securities laws in member states;
  • adding to the fluidity of financial collateral throughout the EU;
  • strengthening the liquidity of markets through favoring market making;
  • simplifying post trading withholding tax relief procedures;
  • developing alternative and pan-European means of financing such as peer to peer lending and crowd funding.

“European capital markets must be open and globally competitive, well regulated and integrated to attract foreign investment, which means maintaining high EU standards to ensure market integrity, financial stability, and investor protection.”

Key principles (capital markets serving the economy, growth, and jobs / financial stability / investor protection) will guide the Commission when putting the above initiatives into practice.

Comment and timeline

The proposals remain, by definition, a bit general. However, they allow getting a sense of where the EU wants to lead us in a few years time. For me, the interesting question is: Do banks need to worry? Will they still have to intermediate, once European financial markets have become as efficient as the European Commission wants them to become? Today, the Commission says yes, because it still needs stronger banks to increase the range of funding sources and make the financial system more stable. For my part, I am not that convinced.

Consultations are to be submitted until May 13, 2015. The Capital Markets Union shall be built until 2019.


Information on the Capital Markets Union is available here.