While politics continues to inhibit progress towards Capital Markets Union, the European private placement market can expect to find itself in the spotlight, writes Brian Caplen.

There is currently huge concern that the Capital Markets Union (CMU) project has lost its way. Some argue that without cross-border banking consolidation, the large European banks needed to drive CMU will not emerge. The growth in regulation since the financial crisis and the purely national focus of many regulators mitigates against banking consolidation.

Financial commentator Huw van Steenis recently pointed out that, in the absence of CMU, care will be needed in winding down the European Central Bank’s bank lending schemes aimed at small and medium-sized enterprises (SMEs), if smaller companies are not to be left high and dry for funds.

And, of course, there is a Brexit angle. Leading bankers have said the CMU doesn’t make sense without the UK, Europe’s largest financial market, but febrile politics on both side of the English Channel are highly likely to derail the sensible course of action.

Perhaps we should not get too excited. In many areas of finance, markets lead the way and then leave it to regulators to catch up. There are signs of this happening with Europe’s private placement market where Germany’s traditional Schuldschein are gaining greater prominence and attracting both non-Germans issuers and investors. The same is true of the much smaller and newer Euro Private Placement market that began as an initiative of French banks and issuers back in 2012.

Schuldschein are attractive to SMEs as they are less expensive to issue than conventional bonds, the documentation is simpler, they do not need to be listed on a stock exchange and they can be tailored to the borrowers’ requirements.

Back in the early 2000s, total Schuldschein issuance was less than €500m. But then in 2008, with the financial crisis drying up bank funding, that figure shot up to €17.9bn and hit a record €28.5bn in 2017. Last year 40% of issuance by volume was non-German.

“CMU is a central element in developing the euro market,” says Société Générale CIB’s global head of debt capital markets Demetrio Salorio. “But while we are still waiting for all the regulations for the public markets to be put in place, the private placement market for corporates is developing rapidly.”

Remember that the Eurobond market grew up in the 1960s because of US tax policy. If the CMU is bogged down in politics and policy issues, the European private placement market may find itself increasingly in the spotlight as the transit point for European SMEs to move their funding from banks to bonds.

I will be chairing a panel discussion on the outlook for capital markets including the CMU at the global meeting of the Swiss think tank Horasis in Cascais, Portugal on May 5.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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