Liberating the capital
The Capital Markets Union is an all-encompassing project announced by the European Commission in January 2015 which aims to create a true single market for capital by 2019. The key objective is to support long-term economic growth in the EU.
CMU has three central pillars: unlocking investment for companies, including SMEs and infrastructure projects; attracting investments into the EU from outside; and opening up the EU's real economy to other investment sources.
In the US banks finance around 25% of the economy’s needs. In the EU, by comparison, about 80% of the economy is financed by traditional bank loans. With post-financial crisis legislation putting further strain on banks’ capacity to fulfil this role, substantial capital in the form of ‘blocked’ savings could be made available to the economy. While diversification of funding sources in Europe is badly needed, the focus should now turn to identifying funding sources complementary to those provided by banks – a sentiment the EC has articulated on a number of occasions.
The CMU encompasses many regulations, directives and industry-driven initiatives. Some pieces of legislation need amending while others need introducing. Before 2008 EU legislation in the form of directives and self-regulation played an important part, especially in the post-trade environment. After the Larosière report in 2009, no place was left for self-regulation: European legislation took the form of regulations. As these became more detailed, international harmonisation grew increasingly urgent. The CMU is the result of the EC’s observations on six years of intensive rule-making. While acknowledging that not all legislation is in force, the EC has consulted the market on the amount of legislation, interactions and unintended consequences; the number of new proposals may be reduced considerably on review.
The project has six goals: financing for innovation, start-ups and non-listed companies; making it easier for companies to enter and raise capital on public markets; investing in long-term infrastructure and sustainable investment; fostering retail and institutional investment; leveraging banking capacity to support the wider economy; and facilitating cross-border investments. These goals are divided into three stages of development: initiatives already underway; short-term and urgent initiatives; and longer-term objectives.
Perhaps surprisingly, liberating capital and reassessing the regulatory environment are in the first tranche. A number of initiatives are underway or in consultation for financing the economy through means other than bank loans. One such is the Prospectus Directive, which would make it easier and cheaper to raise capital on public markets. Simple, transparent and standardised securitisation is also under review, as is launching venture capital. Funds currently ‘blocked’ with insurance companies could be unblocked through revising Solvency II delegated regulation.
The EC’s assessment of the regulatory environment should lead to a better understanding of the impact of recent intensive rulemaking. Questions concern unintended consequences of rules and whether legislation is a barrier to growth. A single European market for capital should indeed be supported by a single rulebook and legislative environment – as simple and clear as possible.
The post-trade environment has also been subject to considerable change in recent years. Self-regulation is long gone and we have had legislation such as EMIR and CSDR and the T2S project, which eliminates cross-border settlement among participating central securities depositories. These pieces of legislation are either still in planning phase or have only partially been rolled out, while others (namely on settlement discipline) have not yet been proposed. T2S has gone live, but three more migration waves are needed before implementation is complete. Although T2S only concerns settlement, it should create harmonisation in the custody industry.
Under CMU categorisation, post-trade issues are considered longer-term actions. We have already had important harmonisation and cost-reduction initiatives. Only specific changes should be proposed to address well-targeted problems in cross-border holding of securities.
Read this article as it appeared in Quintessence magazine (Winter 2016)
"Liberating the capital"