Jean-Claude Juncker, in his political guidelines for the new European Commission, presented the idea of putting in place a Capital Markets Union (CMU) alongside the Banking Union. This would aim to improve the financing of the European economy by further developing and integrating capital markets. It would also cut the cost of raising capital, notably for SMEs, and seek to reduce Europe’s "very high dependence on bank funding."
In the mission letter addressed to Jonathan Hill, Commissioner Designate for Financial Stability, Financial Services and Capital Markets Union, Juncker charged Hill with developing and integrating capital markets as a source of financing for innovative projects and long-term investment.
The content of such a Capital Markets Union was unclear until the release on 18 February of a green paper, Building a Capital Markets Union, which laid down a path for the CMU. The paper identifies European businesses’ heavily reliance on bank funding as a cause of the lack of growth in Europe. This is compared to other parts of the world where investors play a much larger role.
The green paper states that the Capital Markets Union is especially aimed at funding SMEs. This is despite market funding being out of the question for the vast majority of SMEs, which will continue to need banks to finance their activities. According to the Eurostat database, 94% of EU companies have less than 10 employees, and these SMEs will continue to be heavily reliant on banks for funding, as capital markets funding is not a viable alternative. But what about the start-ups that need to free themselves from banks funding? Once again, according to Eurostat, only 0.5% of all EU companies qualify as "high-growth enterprises" – growing at 10% or more.
ESBG therefore believes that it is bizarre to promote the expansion of capital markets in Europe specifically aimed at SMEs, when there are an insufficient number of appropriate beneficiaries, especially high-growth enterprises. Pushing for increased capital markets funding and easier access to it may compete with the activities of traditional banks when there will be no start-ups left to finance. Commissioner Hill has said he will ensure the Capital Markets Union complements the role of banks, rather than displaces them, but we cannot help but see the contradiction and the damage it could cause. In addition, insisting on SME financing through capital markets may lead to severe disappointment, as the whole project may be judged primarily on aiding SMEs.
ESBG does, however, welcome the progress made on securitisation. A functioning securitisation market – supplementing bank loans as a main financing instrument – is essential to support economic development and provide sufficient credit to companies, particularly SMEs. In the event of higher credit demand by corporate borrowers, banks require a complementary, functioning market that allows them to boost lending, beyond the capacity of their on-balance-sheet lending within the scope of the Basel III regime. Securitisation measures will help savings and retail banks do what they do best: finance the real economy.