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06 October 2014

Press release: Graham’s Evidence to the House of Lords

Benefits of the Capital Market Union: getting the regulatory framework right

Benefits of the Capital Market Union: getting the regulatory framework right

- a banking union would pool sovereignty massively, but a capital market union can offset that whilst deepening the single market

Capital Market Union (CMU) is a key priority and one of the biggest projects for Juncker’s new commission, as well as a chance to spur growth and investment in Europe. The Mission Letter to Commissioner-Designate Lord Jonathan Hill included the task of “bringing about a well-regulated and integrated Capital Markets Union, encompassing all Member States, by 2019.”

But can CMU develop into a major contribution to the deepening of European monetary union?

The new paper “The benefits of ‘Capital Market Union’ to EU citizens, businesses and economies: getting the regulatory framework right” by Graham Bishop outlines the advantages of diversifying the financial system:

“A properly-designed Capital Market Union would deepen the single market in finance and simultaneously offset some of the pooling of sovereignty inherent in Banking Union. It would be an open union enabling the savers of Europe to make their own choice about where they put their money – a de-centralisation of power, both financial and political.

As a first step, the new Commission should start with a stock-taking exercise to confirm what still needs to be done to create the single financial market.”

The publication explains what regulatory measures will be needed and proposes a Temporary Eurobill Fund – a similar legal structure to that of the ESM, but with a crucial difference:  only euro states in ‘good standing’ could join.

The report also tackles the implications of CMU for the City of London. “Any significant shift in financing the economy away from the banking sector into the securities markets would be transformational for all those involved in issuing, trading and managing securities. As the pre-eminent centre of such activities for the entire EU, the City should be well placed to benefit,” it reads.

However, the loss of influence of the UK (and other non-euro states) in EU legislation is a risk that will be exacerbated by the ‘Putin game-changer’ in the Council, the report explains. If Poland acts as a serious EMU ‘pre-in’ and votes with the euro area, it will pass the threshold for a qualified majority voting. 

The benefits of ‘Capital Market Union’ to EU citizens, businesses and economies: getting the regulatory framework right will be published on Monday 6 October 2014. To schedule an interview with Graham Bishop, please contact

Press contact:

Name: Graham Bishop
Phone: 0044 (0)7785 323483


What is Capital Market Union?

It is the smooth flow of capital – at savers’ own risk - from them directly to users throughout the European Union, so both stakeholders in society benefit from cutting the cost of intermediaries. The credit standing of users will range from outstanding to just-acceptable, and the maturity of transactions will range from overnight to decades. The financial institutions that intermediate these flows will be regulated by the EU’s single rulebook for all participants in financial markets. As savers are taking the investment risk, they must be suitably educated/informed but protected against non-investment risks.

CMU would complete financial integration and bolster financial stability, as well as promoting the effective implementation of euro monetary policy in all parts of the eurozone economy. Crucially, it is profoundly de-centralising of economic, and thus political, power.

What is the Temporary Eurobill Fund?

It would follow a similar legal structure to that of the ESM with pro rata callable capital - but with a crucial difference:  only euro states in `good standing’ could join, thus excluding those in the ESM `sin bin’. The economic structure would be the plainest vanilla. The Fund would borrow from the markets - exactly matching quantities and maturities requested by borrower states – for maturities ranging up to two years. The key step is that participants would bind themselves to borrow all new funds in this maturity range only from the TEF. In short order, there would be a genuine, single European yield curve for this market sector – with a TEF size of €0.8 trillion (nearly 10% of GDP). Members would also have the right to re-finance maturing issues by borrowing from the TEF – thus removing roll-over risk and enhancing financial stability.

Political Governance:The decision-makers will be the Finance Ministers.

Can it be done? Yes – The Expert Group was clear that an ordinary Regulation of the European Union could set up the operational platform although a separate Inter-Governmental Agreement would be necessary to bind participants to decisions about the financial management of the fund: membership, size, maturity etc.  The key is that there would be no need to change the main European Treaty.

The Plan would be good for Europe because:

  • It binds the participating euro area states into closer financial solidarity – thus encouraging greater observance of the economic governance commitments.
  • Politically, the broadening of the `common interest’ of each EU member in the economic policies pursued by fellow members would be accelerated.
  • Monetary policy would also be simplified, as the TEF would purchase more than half the securities of each state that the ECB would consider buying for OMT purposes. With current talk about QE, TEF bills would be a natural public asset to purchase, as they would not represent monetary finance of governments and the state-by-state exposure would already have been agreed at the politically accountable level of finance ministers.
  • Banking union would be re-enforced, as short term TEF bills would be the most natural High-Quality Liquid Asset (HQLA) for banks to hold. The `doom loop’ between banks and their sovereign would be cut by more than a third - at a stroke.
  • The concept of a Capital Market Union would be boosted as all financial institutions – insurance companies, pension funds, corporations and mutual funds – would have a ‘European’ asset to satisfy their legitimate economic needs for holding short-dated safe and liquid securities.
  • A minor practical benefit - but perhaps looming larger in restoring public trust in financial markets – is that a public authority would provide reference pricing based on massive activity for all financial contracts that need to specify an interest rate for any particular short maturity. That would include the variable interest rate on say longer-term mortgages and bonds.
  • The existence of a yield curve for the safest and most liquid asset would naturally encourage the markets to innovate products with somewhat higher credit risk, and thus return.  This should provide a welcome boost to `good’ securitisation of say packages of loans to SMEs that would back commercial paper issued by banks and non-banks. The ECB’s easy money policy could then reach SMEs across the entire euro area.


© Graham Bishop

Documents associated with this article

PRESS RELEASE-GB, House of Lords.pdf

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