23 April 2018

Financial Times: Why the EU capital markets union matters for ECB policy

The crisis taught us the importance of good financial plumbing. Enormous progress has been made but the minutes of the European Central Bank’s March meeting “stressed the need to make progress on the completion of the banking union and the capital markets union (CMU)”. So what should investors and bankers make of the EU’s announcement of plans to fast-track its CMU programme by 2019, due to Brexit? CMU has the potential to fashion a more diversified funding market and ought to be far less contentious than other structural reforms. But if it fails to flourish, it will limit the speed at which Europe’s central bank can unwind unconventional policy. One of the most important unconventional actions by the ECB has been its super-sized special bank lending schemes. The current one, TLTRO II, which pays banks to lend to small and medium-sized enterprises, was such a success that the scheme had an exceptional €740bn take-up — due to be repaid within the next three years.

How should investors score progress? First, will CMU proposals help channel equity, not just cheap debt? Europe’s growing companies also need access to the equity market, from venture capital to growth capital to listed equity. Europe is lagging far behind. Equity finance is 67 per cent of eurozone GDP versus 125 per cent in the US. François Villeroy de Galhau, governor of the Bank of France, argued recently that’s why innovation is less well financed in Europe. Second, will Europe harness private markets as much as public? Mid-sized companies should be able to tap long-term savings via a pan-European private placement market that gives them access to long-term competitively priced funding. There are currently no plans for a pan-European private placement market, according to a recent panel at the International Institute of Finance in Washington. Yet it is well suited to growth companies. Third, will Europe leverage global capital pools to fund its growth? Brexit has increased sensitivities to the rules for international finance. But protectionist instincts need to be tamed by the benefits of channelling American, Asian or British capital to fund growth or solve problems. Eight of the 10 largest buyers of non-performing loans from eurozone banks in the last few years were Anglo-Saxon specialist investors, according to a Deloitte survey. London is the fintech capital of the world. Fourth, will the regulatory framework promote long-term, sustainable investing? Long-term thinking does not mean neglecting healthy market liquidity. Rather, authorities should seek to remove obstacles to long-term investment. Insurers and pension funds could be encouraged to add allocations through recalibrating the treatment for long-term assets. Fifth, will regulations be recalibrated to help finance flow and keep pace with technology? Inevitably, given the large number of new rules, some are inconsistent with each other and act as a drag on the economy. Regulations also need to keep up with the tremendous advances in technology. Regulators need to take stock, otherwise European growth may lag behind.

Full article on Financial Times (subscription required)

© Financial Times