January should see the launch of a green paper by the European Commission soliciting comment on its grand plan for a Capital Markets Union (CMU).
In many ways, such a union looks like a no-brainer as it can only improve transparency and funding costs for corporates across the region, but this is Europe – and, therefore, nothing is simple.
Advocates for a CMU argue Europe’s corporate capital markets are only operating at 40% capacity, resulting in a €1 trillion shortfall between what is raised today and what could be raised if they were as deep as they are in the US versus GDP. A CMU can rectify this, they claim – but only after everyone agrees on what it actually means and who it is for.
Who it should be for is Europe’s savers, who have traditionally put their money in banks, insurance companies or government bonds. With a savings rate far higher than that of the US or UK (10% versus 3%), there is a strong case to be made that savers in Europe need more capital markets instruments to invest in.
However, using the US as a template is a big mistake. The US capital markets are the product of its unique buy side, which is dominated by self-directed 401(k) pension plans. Europe has large pools of cash trapped in final salary schemes and pension income often comes from state- run schemes.
The idea that a US-style equity culture can or should be imposed in Europe fuels the argument that CMU is about what intermediaries – investment banks – want to sell far more than about what end-users want to buy.
|These are all laudable goals, |
but are also nothing new
A CMU is, therefore, something of a misnomer. This is about making it easier to invest in capital markets instruments in Europe, not about replicating the initiatives that are being introduced in the banking sector.
The Association for Financial Markets in Europe has published an agenda for a CMU, which focuses the debate on the supply of securities, the demand for securities and trading and infrastructure. It wants to see the revival of high-quality securitization and the development of a pan-European private placement market. Stimulation of non-bank lending is also a goal. A CMU should also revitalize the equity markets, harness long-term savings to promote investment and achieve greater harmonization of EU insolvency rules.
These are all laudable goals, but are also nothing new, so the question is whether an overarching CMU initiative makes them more or less likely to happen.
The mechanics by which some of these aims can be achieved are fairly straightforward:
- Securitization? Revisit capital weightings under Basel III and Solvency II;
- Private placements? Remove legal obstacles to ownership;
- Non-bank lending? Remove the need for alternative lenders to be granted a banking licence in some countries and allow them a passport to operate throughout the region;
- Equity? Remove favourable tax treatment for debt or introduce an equity tax credit;
- Savings? Introduce long-term investment funds.
- Harmonizing insolvency rules? Err…
Perhaps the first thing that the EC’s Hill needs to figure out is whether a CMU necessitates a new central supervisor. It could either recreate European Securities and Markets Authority as a Securities and Exchange Commission-in-waiting or involve the establishment of a new central body.
There is huge and understandable resistance to the idea of a new supervisor, but it is difficult to see how any new rules can be consistently applied across Europe and regulatory arbitrage avoided without one.
The thorny problem of regulatory consistency is relevant here. Hill is soon expected to launch a study into the cumulative impact of all EU capital markets rules introduced since the financial crisis, something the market will welcome as long overdue, as it is hard to fathom how the aims of a CMU sit comfortably with previous initiatives, such as the financial transactions tax.
It is just the first step in what is likely to be a time-consuming, controversial, but hopefully ultimately worthwhile exercise.