Building a “Capital Markets Union” for the 28 EU Member States was presented as one of the main priorities of Jean-Claude Juncker when he was appointed President of the European Commission last year. He saw it, together with his 315 Billion Euros investment plan, as part of his most important policy goal: to help boost jobs, growth and investment across the EU.
Why focus on capital markets? The reason is simple: companies in Europe are too dependent on bank funding. Whether this is the result of companies not having sufficient access to the markets, or the markets not being sufficiently deep to support the funding needs of European companies, is unclear. The European economy is as big as America’s but Europe’s equity markets are less than half the size and its debt markets less than a third. European SMEs receive five times less funding from capital markets than American SMEs. And the differences in access to the capital markets between EU countries is even bigger than between the EU and the US.
A consultation was launched in February 2015 on “the measures needed to unlock investment and create a single market for capital”. Related consultations were launched on the prospectus directive and securitisation. The feedback was very positive: the “CMU” concept received wide support, as it would help support more cross-border risk-sharing, create deeper and more liquid markets and diversify the sources of funding in the economy.
Encouraged by this support, the Commission developed the concept and on September 30, an action plan was presented on “building a Capital Markets Union” (http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-action-plan_en.pdf).
Its main concrete elements are a regulatory framework for securitisation, amendments to Solvency II and the Capital Requirements Regulation to encourage investments in infrastructure and a legislative review of the Prospectus Directive aiming at reducing the administrative burden. The plan includes also an inquiry on the “cumulative impact of financial legislation”, an effort at tracking “inconsistencies, incoherence and gaps” in the numerous financial rules adopted in the EU after the financial crisis.
The CMU action plan was presented by Jonathan Hill, the British Commissioner responsible for Financial Stability, Financial Services and… Capital Markets Union. It was immediately criticised by some for its lack of ambition, by others as having been designed to favour the City of London or to target the dominating position of Eurozone banks in lending for investments; some wondered also if it was wise to revive securitisation given the issues that arose in these structures during the financial crisis.
The plan indeed chooses a step by step approach rather than a grand design and contains few new initiatives. Lord Hill himself noted in an op-ed in the Financial Times that he did not want “to disrupt markets that are working well in pursuit of some theoretical perfection”. From the point of view of the international banks, Hill noted in a private breakfast with representatives of the industry that they would be strengthened by the return of securitisation and that in Europe “securitisation worked much better than in the US”.
Hill insisted also on the fact that the CMU was designed for the 28 Member States and not just as an instrument for the Eurozone countries. On the link with “Brexit”, he reminded that the CMU is part of the single market, which is what his compatriots prefer in the EU and that the British financial services industry obviously wants to be part of shaping the rules rather to have them imposed from outside.
The careful step by step approach chosen by the EU Commission to develop the use of capital markets in Europe is wise.
Security markets are very diverse and complex and are already subject to numerous legislative changes, including MiFID 2. It would not be wise to start negotiating a new over-reaching reform before being able to assess the effects of MIFID.
We should also remember what happened in the US in the late nineties when the SEC tried to revamp completely the statute governing capital formation – which had been enacted in 1933. The markets had clearly evolved, and there were things that needed changing. But the SEC staff tried to write the statute that they thought made sense in 1998, even though some of the oddities of the 1933 version were causing no problems. The result (pejoratively referred to as the “Aircraft Carrier”) did not become law – the markets and bar reacted very negatively, with the result that even the aspects that made sense were not enacted.
Several years later, in 2005, a more tailored reform of US securities offering procedures was proposed by the SEC staff and enacted. We think that Lord Hill’s decision to not disrupt markets in pursuit of some theoretically more sound regulatory structure makes sense, and we look forward to the development of meaningful but tailored initiatives as part of CMU.