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Western EuropeJune 23 2020

European Commission seeks to reboot Capital Markets Union

Recommendations on how pan-European project should proceed have been well received by industry.
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European Commission seeks to reboot Capital Markets Union

The European Commission is attempting to breathe new life into the Capital Markets Union (CMU) declaring it to be more urgently needed than ever to revive the continent’s Covid-19-battered economies and to transition towards green and digital industries. 

“Savers and investors will play a vital role in getting the economy moving again and they need to have the confidence to invest through capital markets,” declared commission executive vice-president, Valdis Dombrovskis. “And companies need to be able to access diversified sources of market-based financing anywhere in the EU.” 

The CMU, a project to drive pan-European capital markets, has never quite taken off since its inception in 2015. The EU’s authorities see it as a way to wean Europe’s economies off their dependence on bank finance, but it has met with indifference in some member states. 

A hurdle is that many European countries do not have a vibrant equities culture. French investors often favour money market funds while their German peers tend to prefer bonds. Indeed, the number of companies listing on Europe’s stock markets has been steadily declining. 

Yet as the US has aptly demonstrated, equity investment plays a vital role for growing new companies and industries. 

A further complication is that the UK, which hosts Europe’s largest financial centre, is set to leave the EU’s economic arrangements on December 31

Brexit setback

A further complication for CMU is that the UK, which hosts by far Europe’s largest financial centre, is set to leave the EU’s economic arrangements on December 31. This leaves firms and investors within the block potentially more dependent on third country capital markets. 

The latest bid to give the project a boost came on June 10 from the commission’s high level forum (HLF) launched in late 2019 and made up of industry experts and academics. The forum’s latest report, called a ‘New Vision for Europe’s Capital Markets’, contains 17 recommendations, grouped under four headings. These are: the financing of business, market infrastructure, individual investors’ engagement and obstacles to cross-border investment.

Thomas Wieser, who chairs the forum, explained that the report has precise and clear recommendations on what should be done in order to move Europe forward. “We emphasise that this is not a menu from which one can order two or three courses, and go home satisfied. The 17 clusters of measures are mutually reinforcing, and dependent on each other.”

Mr Dombrovskis said the commission will consider each of the recommendations ahead of the next CMU action plan in early autumn. His enthusiasm for CMU is understandable given that the commission estimates that another €260bn a year is needed to fund the greening of the EU’s economy. 

The report’s authors called for the EU to make some bold moves. Among them is to enforce smart rules and efficient supervision across the union’s markets to foster more activity. The commission should amend European Long Term Investment Funds (ELTIFs) regulatory frameworks and member states should simplify their taxation or give preferential tax treatment to these funds. ELTIFs are alternative investment funds, which channel capital into the real economy with a view to driving sustainable growth. 

The HLF believes the commission should make some tweaks to its prudential regimes for banks and insurers to encourage equity investment. In particular, it advises looking into  provisions affecting market making and long-term investment in SME equity by banks and non-banks, when implementing the Basel III standards. It would also like to see improvements to the regulatory regime to spur more securitisations enabling banks to free up their balance sheets. 

They said that would involve adjusting the prudential treatment of securitisation for banks and insurers, supporting the development of synthetic securitisation, reconsidering the eligibility of securitisations for liquidity purposes, as well as simplifying disclosures.

Another is to create a single point of access where investors can find financial and sustainability information about EU companies, including for smaller firms. Allied to that, they wrote that this data along with its reporting formats should be standardised to make it easier for investors to make comparisons. They believe this task should be handed to the European Securities and Markets Authority (ESMA). 

The forum would also like to see investment research on smaller listed firms excluded from the unbundling requirements contained in the Markets in Financial Instruments Directive (MiFID) II, which stipulates that asset managers must pay for research separately from brokerage fees. There is strong support for that recommendation from the French authorities. 

Report widely welcomed

The report attracted widespread support from industry associations. Indeed, many of the recommendations mirror those made by the European Banking Federation and the Markets for Europe campaign it supports. 

The Association for Financial Markets in Europe praised the aim of placing equity markets and retail investors at the heart of the CMU and strongly supports reviewing the securitisation regulatory framework and the measures for improving efficiency and connectivity in EU securities markets. 

The International Capital Market Association said it shares the vision of the HLF and supports many of its recommendations. But it felt the report missed an opportunity to address comprehensive coverage and data quality issues. 

The European Fund and Asset Management Association, while broadly welcoming the report’s contents, also reflected on data issues. “We are disappointed to see that the report does not refer, even incidentally, to the increasingly important issue of data costs,” the association said, adding that it believes these costs to be a clear impediment to the effective functioning of CMU. 

However, the jury is out on whether this latest push by the commission will be enough to see CMU come to fruition with some market participants still doubtful. Reflecting those frustrations, David Clark, chairman at the European Venues and Intermediaries Association, noted that the inadequacies of the EU's financial markets infrastructure have been known for years, but CMU always seems to get relegated as a priority in Brussels.

This article first appeared in The Banker's sister publication Global Risk Regulator.

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