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INSIGHT
“We would like the final proposals to reduce
fragmentation and increase the depth of Europe’s
capital markets, which will lower the cost of
capital, improve its allocation and ultimately better
support Europe’s growth companies to create jobs”
through CMU. First, it wants to improve
access to finance for all businesses and
infrastructure projects across Europe.
Second, it wants to help SMEs raise
finance as easily as large companies.
Third, the Commission is aiming to
create a single market for capital by
removing barriers to cross-border
investments. Finally, there is a desire
to diversify the funding of the economy
and reduce the cost of raising capital.
Simon Lewis, chief executive of the
Association for Financial Markets in
Europe, welcomes the proposals, saying:
“Capital Markets Union is an essential
reform project to revive the EU economy,
and the financial industry can and
will make an important contribution.”
He adds that he particularly welcomes
the emphasis that Lord Hill is placing
on securitisation and the Prospectus
Directive (a directive specifying the
requirements for prospectuses that
are prepared for investors when
securities are issued), both of which
are subject to separate consultations
in the coming months.
Lewis’s views are echoed by Sally Scutt,
deputy chief executive of the British
Bankers’ Association (BBA), who says
that the initiative is extremely important
for the EU’s attempts to kick-start
growth in Europe. “We would like the
final proposals to reduce fragmentation
and increase the depth of Europe’s
capital markets, which will lower the
cost of capital, improve its allocation
and ultimately better support Europe’s
growth companies to create jobs,”
she says.
It has, however, also been suggested
that there could be resistance to CMU
among certain sections of the banking
community, particularly those regional
banks that are focused on national
markets and medium-sized companies.
But the BBA believes there is little to
fear because it does not see banks and
capital markets as competitors; it sees
them as complementary.
levels of certain investments (such as
leverage loans, high-yield bonds, initial
public offerings (IPOs) and private
equity (PE)) with their potential size
if European capital markets were as big
relative to GDP as in the US.
The report reveals that there was some
$3,725bn ‘lost’ in leveraged loans, $775bn
in high-yield bonds, $110bn in IPOs and
$390bn in PE. Quite some difference.
As MEP Philippe de Backer, chairman
of the Task Force, says: “In order to
deliver a Capital Markets Union in
Europe that can provide more diverse
funding sources for companies and
cut the cost of raising capital, notably
for smaller companies, we need
policymakers, regulators and industry
to work together to deliver reforms to
regulation, to the tax regime and to
market practices that will make IPO
funding through the public markets
accessible to all European companies.”
Although the report focuses on IPOs,
its conclusions cut across the whole
equity and capital piste. It calls for a
more balanced and flexible regulatory
environment, easing of constraints
that restrict investors’ access to
markets, improved tax incentives and
Yet Scutt warns that the proposals
need to be seen in the context of
other EU plans that could prove
counterproductive. “Introducing a
financial transaction tax or restricting
banks’ ability to conduct market-making
activities for their clients through further
structural reform could undermine
attempts to inject greater liquidity into
capital markets,” she says.
Problems and pitfalls
So what are the real problems that
CMU is trying to address, and what
are the pitfalls that could lie ahead?
As Hill says, the free movement of
capital was enshrined in the Treaty
of Rome more than half a century ago.
But the European Commission argues
that capital markets today remain
fragmented and are typically organised
on national lines. This was brought
into sharp relief following the financial
crisis of 2008, since when the degree of
financial market integration across the
EU has fallen, with banks and investors
retreating to home markets.
So, from a position of heading towards
a unified market, similar to that seen
across the Atlantic in the economic
powerhouse of the US, Europe appears
to have turned around, and is heading
back towards a position of 28 smaller
markets with less liquidity, and therefore
less investment and capital available to
be put to use by business to help achieve
the Commission’s stated aim of creating
more jobs and economic growth.
The differences between the US and
European environments are laid bare
in
The EU IPO Report: Rebuilding IPOs
in Europe
, a new report from the EU
IPO Task Force, a group led by quoted
company membership association
European Issuers, the European Private
Equity & Venture Capital Association
and the Federation of European
Securities Exchanges. Highlighting
the ‘lost investment’ in the European
economy, the report compared the actual
KEY PRINCIPLES
The European Commission’s green paper
identifies the following key principles, which
should underpin a Capital Markets Union:
•
It should maximise the benefits of capital
markets for the economy, growth and jobs;
• It should create a single market for capital
for all 28 member states by removing
barriers to cross-border investment within
the EU and fostering stronger connections
with global capital markets;
• It should be built on firm foundations of
financial stability, with a single rule book
for financial services that is effectively and
consistently enforced;
• It should ensure an effective level of
investor protection; and
• It should help to attract investment
from all over the world and increase
EU competitiveness.
IAFEI Quarterly | Issue 29 | 47