Venture capital for small businesses, long-term investors for infrastructure and new funding channels for banks will be the priorities for the next stage of the European Commission's capital markets union plans, says European commissioner Jonathan Hill.

Jonathan Hill

Today, Europe's biggest challenge is the lack of economic growth and jobs. That is the backdrop to the European Commission's plans for a Capital Markets Union, one of its three major single market projects, alongside energy and digital services.

At its most simple, capital markets union aims to link savings more effectively to growth – to improve the funding 'conveyor belt' so that more businesses at different steps in their development can get the capital they need to expand.

By bringing down barriers within the single market, I want to help ensure that capital can flow more freely across the whole EU. This is for all 28 member states, particularly those with less well-developed capital markets whose businesses need more sources of funding. From the smallest start-up to the largest scale, longest term investment infrastructure project, it could offer new opportunities for investment and growth.

We have received a groundswell of interest and support: from the European Parliament, from the European Council, and from the 700 responses to our consultation. Building on the feedback we have had, we are concentrating our efforts in three main areas.

Small businesses

First, we need to help start-ups and small businesses to grow and develop. When it comes to financing, one size doesn't fit all. We need to support start-ups and small businesses if we want to see a more dynamic economy creating jobs. As they grow and develop, they may need different kinds of financing: from angel investing, peer-to-peer lending, equity crowdfunding and venture capital, to private placements, and listing shares or bonds to be invested in by the public.

Europe has plenty of talent and creativity. But at the moment, too many European ideas and entrepreneurs are going to the US for their funding. I want them to have the choice to stay and grow here in the EU. That is why I intend to launch a comprehensive package to support venture capital and equity financing.

For example, before companies go public, they must provide a prospectus, so investors have intelligible information on which to base their decisions. But for some businesses, especially the smallest, this requirement can impose unnecessary or disproportionate obligations – making it too costly to raise funds on capital markets. And for some investors, an overload of information is not as useful as focused information on the key risks. So we will review and modernise the prospectus directive.

Long-term investment

Second, we need to create opportunities for investors – such as for long-term investment in infrastructure. Europe is falling short on investment in infrastructure – with needs as great as €2000bn up to 2020. Such investment needs a long-term commitment. With deep balance sheets and long time-horizons, life insurance companies, insurers and pension funds are the natural people to do it. But more recently, these institutional investors have been retrenching. Some argue that this is in part because of the regulatory framework and how it treats infrastructure as an asset class. That is certainly something we should take a serious look at. We also plan to adjust Solvency II calibrations to make investment in infrastructure more attractive, and we are reviewing our legislation on capital requirements for banks.

But it is not just about large institutional investors; retail investors should be the backbone of the capital markets. Many households need to save for the future and want to get a better return than is available from today's low interest rates; if more do so, that would represent a significant investment in our economy, and better link savings with growth. Yet the proportion of retail investors among all shareholders is less than half what it was in the 1970s. We need to increase transparency and trust.

Equally, there are many long-standing and deep-rooted barriers to cross-border investment: whether it is national rules on tax, insolvency, collateral or securities, or information problems (for example, ensuring consistent access to smaller companies' credit data). We are considering all these issues and also making sure that our supervisory arrangements work as well as possible.

Don’t forget banks

Third, we should not forget the role of banks in funding our economy. Bank lending is and will remain the staple source of funding for small and medium-sized enterprises (SMEs), and, for many, banks will still be the natural choice.

For those who cannot access capital markets directly, tools such as securitisation can help them to do so indirectly via banks, offering an effective way to diversify the funding base and free up bank balance sheets to lend. Such tools have suffered stigma since the crisis, and we certainly do not intend to open the door to the bad old ways of the past. But working with central banks and regulators to build a new framework for simple, transparent and standardised securitisation will help to ensure standards are high and give confidence to new investors to enter the market. If SME securitisation could be returned – safely – even to half the levels they were in 2007, this could be equivalent to some €20bn of additional funding. We will be bringing forward proposals for legislation in the autumn.

During the crisis, we had to legislate in a hurry to restore financial stability: that legislation was needed and achieved its objective. But, in the context of today's economy, we should also check whether those rules have had any unintended consequences or impacts; this is part of the whole European Commission’s commitment to better regulation, to be proportionate in our approach, and to strike the best possible balance between managing risk and enabling growth. It is in this vein that we have begun to consult on the impact of the capital requirements rules for banks – including the effect they are having on small businesses and infrastructure investment.

Taken together, I think these measures can constitute a boost to European investment, jobs and growth. I believe that a capital markets union can make a real difference to European jobs, growth and investment. But we must not make the mistake of thinking you can legislate for growth. We can help set the framework – but it is businesses that will create the growth and jobs we want.

Over the summer we have reflected on the further steps we can take; in the autumn we will come forward with a detailed action plan: combining ambition for the long term with a step-by-step approach, making quick progress where we can.

A commitment to the free movement of capital was originally set out in the Treaty of Rome. Now, nearly 60 years later, we have the opportunity to make some new progress on that old challenge. That is an opportunity we need to seize for the good of the European economy, of Europe's SMEs, of investment in infrastructure and of Europe's banks.

Jonathan Hill is the commissioner for financial stability, financial services and capital markets union at the European Commission.

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