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ICMA is concerned that the regulatory response to the crisis has comprised a series of individually designed measures without there being an overall understanding of the way in which the pieces would fit together. Accordingly, it is very welcome that ongoing efforts are being made to evaluate impacts and is important that there be a willingness to recalibrate elements in order to try and address unintended consequences.
ICMA has been particularly concerned about impacts on the market, especially ways in which regulation has created fragmentation. Our studies have shown the importance of fixed income markets as a financing channel and drawn attention to the fact that increasing regulatory burdens, in particular tighter capital constraints on banks, have put market making activities, in both cash bonds and repos, under significant strain. This implies that a higher price should have to be paid on bond issuance in order to cover the reduced market liquidity – although this has been masked by the exceptional monetary policy measures taken by Central Banks which have, for important and well-intentioned reasons, continued to make available large amounts of cheap cash and thus acted to compress issuance spreads.
CMU is conceptually a good further step to develop well-integrated EU capital markets, all the better to boost financing options and meet the challenges of continuing to deliver economic growth in mature economies, but despite progress on many potentially worthwhile initiatives, results thus far have been underwhelming in their impact. Many measures are only just agreed by the co-legislators and their effects therefore remain to be seen. Others are further advanced but there have been significant problems with implementation, including where Level 2 technical standards have not been agreed in time.
It is also widely recognised that CMU is a complement to the EU’s well-advanced endeavour to introduce Banking Union. Completion of the latter is of significant importance, not only to ensure that the objectives of Banking Union are secured, but also since the CMU can itself benefit from the EU having a robust EU-wide banking system – given that banks are themselves important actors in capital markets. Alongside this, progress with other initiatives to further strengthen the Economic and Monetary Union also offer significant potential to act in ways which will greatly benefit CMU and vice- versa. Two elements discussed in this context which are particularly germane are the possible steps to boost the international role of the euro and the examination of how to create a European safe asset. Each of these can do much to add to the strength and depth of European markets, making them more attractive and better able to deliver CMU’s objectives.
While many more detailed steps need to be taken to progress CMU and better fulfil its objectives, ICMA considers that there is a big opportunity which currently lies in front of the EU is to fully exploit the synergies between each of the CMU, the sustainability action plan and the FinTech action plan. At the same time, it will be essential to maintain the EU’s competitiveness in globally interconnected capital markets and to avoid that the fragmentation inherent in Brexit has an unduly negative impact.