The EU’s new financial services commissioner will set out his plans for a pan-European capital market by the middle of next year, aiming to reduce companies’ reliance on banks and help revive the bloc’s fragile economy.
Jonathan Hill said on Thursday (7 November) he was seeking to create an integrated market for raising money through bonds, shares and other financial instruments over the next five years and would develop a plan by next summer following a consultation of banks, lawmakers and non-governmental organisations (NGOs).
“We still do not have a fully functioning single market for capital,” Hill told a conference of EU officials and business leaders. “I will be bringing forward proposals to deliver a capital markets union; a project for all 28 EU Member States.”
Channelling more money into small companies is seen as crucial for Europe’s efforts to avoid economic stagnation because small and medium enterprises provide two out of every three private-sector jobs in the European Union.
Following the worst financial crisis in a generation, banks are reducing riskier lending to build up capital buffers, a problem in a continent where banks account for 80 percent of corporate loans.
Officials say a capital markets union would also mean the EU moving beyond public subsidies and loans to coordinate financing for companies and infrastructure through project bonds, public-private partnerships and infrastructure funds.
Jeroen Dijsselbloem, who chairs the meetings of eurozone finance ministers, said the capital markets union would need a single European supervisor and the creation of a pan-European insolvency law that would replace national laws.
“This is crucial to create the market that we so badly need in parallel to the bank lending system,” he said.
However, Deutsche Bank co-CEO Juergen Fitschen said that emulating the United States, where capital markets’ funding is far greater than in Europe, would require a shift that Europeans may not be ready for.
Mid-sized companies in the United States obtain about five times more funding from capital markets than their counterparts in the European Union, the Commission, the EU executive, says.
The obstacle for smaller companies on capital markets is the challenge of providing continual information to investors, Fitschen said.
“The biggest hurdle is the culture of the European entrepreneur,” he told the conference. “He is not ready for capital markets because he is not used to answering all these questions.”
The EU is likely to try to support companies by providing such services to investors, although it is not immediately clear how this would work in practice, or who would pay for it.
One idea is a pan-European system of information providers that could specialise in collecting, classifying and analysing data on small- and medium-sized companies for investors, including the size of companies’ outstanding loans.
Hill said his first steps would be to push a proposal for European long-term investment funds for infrastructure and businesses, to develop a framework for securitisation and to carry out analysis of private placements — the sale of securities to a small number of chosen institutional investors.
“I am interested in ideas for more market finance instruments — but not just in safe short-term debt, but in longer term stable debt that encourages long-term investment, and in real risk capital that encourages innovation.”
The European Central Bank is at the heart of wider efforts to create a capital markets union by trying to revive securitisation, or the bundling of loans into bonds to raise cash for companies to invest.