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The fates of banks and capital markets have become intertwined. Banks need capital markets to provide finance, lay off risks and provide a full range of financing services. But the reverse is also true: capital markets need efficient, solid banks to supply clients, infrastructure and – crucially – faith in Europe as a market.
As in the US, the European corporate sector faces a “wall” of financing requirements in coming years. Standard & Poor’s has put eurozone and UK commercial refinancing needs (including banks) between this year and 2016 at $8.6 trillion, with likely new money requirements at about $2 trillion. With banks unable to step into the breach, and European capital markets underdeveloped, issuance on the required scale “could well prove to be a challenge”, the AFME noted [in a background paper prepared for a Brussels conference this week].
The answer is that Europe’s capital markets would be best served by the same things as banks: measures to boost economic integration and confidence in Europe’s monetary union.
That is where repairing the European banking system and building a banking union come in. Common bank supervision will help break the link between banks and individual sovereigns, removing national barriers that deter debt market investors. Progress may be slow. It is unclear yet if the European Central Bank will win responsibility for overseeing all eurozone banks, or just the largest. Germany has prevented moves towards a single deposit guarantee scheme, widely regarded as essential for an effective banking union. But capital markets, including the City of London, have an interest in ensuring plans for banking union are workable, and not ignored.
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