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First, CMU would play a key role in diversifying the funding sources of European non-financial corporations, thereby enhancing the smooth transmission of monetary policy. Second, CMU actions focused on increasing cross-border equity financing and cross-ownership of assets within the euro area/EU could represent an important risk sharing mechanism and smooth consumption growth. Foreign direct investment (FDI), foreign equity and longer maturity debt in general would lead to a more resilient form of financial integration.
The European Commission’s Action Plan on CMU is a step in the right direction. The ECB supports many of the initiatives which have been undertaken by the Commission, such as its proposal on simple, transparent and standardised (STS) securitisation, its actions to foster further integration in financial market infrastructures and its efforts to reduce the debt-equity bias in tax systems.
As ECB explained in detail under section A, further action is needed to foster robust cross-border capital flows and sound financial integration. Importantly, further action is needed regarding the harmonisation of insolvency frameworks, taxation and company law to remove cross-border barriers to financial integration.
Furthermore, measures focusing on improving access to market-based financing must be complemented by other policy measures targeted at firms which depend on bank funding. Bank finance appears to be more important at earlier stages of development, when it supports capital accumulation, while market finance is more important at later stages of development because it stimulates innovation and technological change.
The banking union supports and complements the CMU. Banks remain an important actor within CMU. They are active in capital markets as service providers, investors and issuers. In this regard banks and capital markets complement rather than substitute one another. An increasingly integrated banking market should also support the integration of capital markets in the EU because more banks would be in a position to offer their products and capital market services on a cross border basis.
The CMU project should not lead to a weakening of prudential standards. There need not be any trade-off between supporting the financial sector, in the context of CMU, and appropriate supervision. The very significant gains achieved post-crisis in introducing legislation that strengthens the banking sector and reduces both the probability of public support and the amount of such support need to be preserved and moreover strengthened. While largely completed, the banking regulatory agenda still requires finalisation.
An increased non-bank financial sector should be accompanied by an expansion of the prudential framework for non-bank financial institutions to adequately address systemic risks. The regulatory agenda for the non-bank financial sector is still developing, and the supervisory framework is highly fragmented.
A strengthening of the single market supervision at EU level is needed. Although the establishment of the European Securities and Markets Authority (ESMA) has been a major step towards fostering convergence of national supervisory practices, the supervision of securities markets remains at the national level, which fragments the application of EU legislation.
New perspectives have emerged since 2015 when CMU was designed. While the situation in terms of overcoming financial fragmentation and constrained access to finance has clearly improved recently, it has also become even more evident that more integrated capital markets can deliver more private risk sharing across countries and reduce the diverging effects caused by asymmetric shocks. This is especially relevant for the euro area. Furthermore, the departure of the United Kingdom from the European Union will change the economic, institutional and political landscape in Europe. The imperative for building a true CMU is becoming even stronger, as the remaining Member States should have an increased interest in further developing and integrating capital markets within the EU27.