EU unveils plan for capital markets union to fuel economic growth

The EU will relax capital rules it has imposed on banks and insurers since the financial crisis to help markets raise more funds and jump-start economic growth, said Jonathan Hill, financial services commissioner, announcing an action plan including 33 measures and legislative proposals that will put in place the building blocks of a capital markets union by 2019.

The EU proposal is designed to reduce dependence on traditional bank financing. “In the US, SMEs get about five times as much funding from the capital markets or non-bank financing as they do here in the EU,” the Commissioner said. “And if our venture capital markets were as well developed as they are in the US, companies could have raised an extra €90 billion over the past five years.”

With only a quarter of corporate fund coming from the capital markets, the continent is exposed to ebbs and flows in the availability of credit, as dramatically underlined when credit dried up in the financial crisis of 2007-09.

To help unclog the pipes, the Commission will make it cheaper for banks to sell high quality securities based on the pooling of loans such as mortgages - known as securitisation - to institutional investors.

Hill also wants to encourage insurance companies to invest in infrastructure by cutting their capital charges on such investments by about a third. Insurers have around €9 trillion on their books, the Commission said, but less than 0.25 percent is currently channelled towards infrastructure projects such as telecoms networks or roads.

By the end of the year Hill’s team will return with reform proposals for the Prospectus Directive, the EU legislation that set outs what information companies must provide to investors when seeking to raise capital. 

Prospectuses written to inform potential investors in the lead up to an initial public offering, “can be real doorstoppers”, said the Commissioner. “They can run into hundreds of pages and cost up to €100,000. Of course, they need to provide clear evidence for investors, but also be affordable.”

Hill also announced a review of the welter of financial laws passed in the years since the financial crisis. “We’ve had to legislate at speed in the last five or six years,” he said. “We do need to check the cumulative impact of these rules has not had unintended consequences.”

This will play well with the British government, which is campaigning to roll back some unpopular EU legislation ahead of a referendum on EU membership by 2017.

In the medium-term, the Commission will step up the number of “weapons it has in the armoury”, said Hill.

Among the future measures will be a review of how to make corporate bond markets work better; legislation to make a stock market listing more attractive; and a possible easing of accounting rules for companies listing on "growth" stock markets.

In addition, Hill confirmed he is launching a consultation process on venture capital and covered bond markets – two potential sources of long-term financing for businesses.

Defending securitisation measures

For banks, the logic of securities is that it allows them to shift loans off their balance sheets, which gives them the chance to lend more.

But the market was labelled “toxic sludge” following the banking emergency in the US that led to the financial crisis in 2007.

The Commissioner played down fears that he was re-opening the box to the kind of excessive, over-leveraged securitisation deals conducted in the immediate years preceding the financial meltdown.

“If you look at the record in Europe [on securitisation], it was much better and stronger than in the US,” he said. The whole process has been stigmatised, contaminated by what happened in the US.”

“I’m not seeking to copy and paste the American system,” Hill continued. “We’re different. No one at all is suggesting this is what we do.”

His EU plan by contrast promises to be “simple, transparent and standardised”.

According to the Hill’s estimates, if the securitisation market is revived to pre-crisis levels, banks could provide an additional €100 billion in credits to the private sector.

Charges still too high

Insurers gave the proposal a cool welcome. A step in the right direction, said Michaela Koller, director general of Insurance Europe, the sector's main lobbying group, saying, “These changes are not enough to remove the barriers to investment by insurers", as capital charges remain too high.