Hill woos bankers ahead of capital markets announcement

Jonathan Hill [European Parliament]

Days before the European Commission presents its long-awaited proposal to reduce the “very high” dependence on bank funding from European businesses, the executive appeared to have softened its tone towards the banking sector.

Jonathan Hill, the EU Commissioner for Financial Services, said he hoped banks would play a “pivotal role” in the upcoming capital markets union, to be announced on 30 September.

The development of capital markets in Europe is “a way of complementing bank funding, not replacing it”, he told the European Banking Federation’s annual conference on Thursday (17 September).

Commission President, Jean-Claude Juncker promised to further develop and integrate capital markets across the 28 member states to “reduce our very high dependence on bank funding”.

Banks are the source of cash for around 75% of SMEs in the EU. This high dependence on bank financing has put the brakes on the European economy when things turned bad during the financial crisis, the Commission believes.

>>Read: French report pushes for early creation of Capital Markets Union

However, Hill announced specific proposals to facilitate a place for the banking sector in the capital markets. His package will also include a proposal on securitisation, in order to create “a new, simple, transparent and standardised product” through a set of mandatory “effective criteria”.

This will help banks to (deal with) diverse risks, and to better target their lending, Hill said.

Securitisation is the process of creating a financial instrument by pooling assets. Investors can purchase shares of those assets, thereby increasing liquidity. However, studies have concluded that securitisation is associated with a deterioration in the quality of banks’ loan portfolios and an increase of the credit risk in their balance sheets.

But Hill emphasised that his plans “will help to unlock investment” and “ensure a more diverse and resilient financial system”.

Niall Bohan, Head of Unit for Capital Markets Union at the Commission, explained during the conference that the package will include different instruments to look beyond the banking sector and to meet the financial needs of businesses across Europe. It will comprise instruments such as crowdfunding, venture capital, equity, promotional banks, private placements and public markets.

Banks welcome the package

The banking sector welcomed the Commission’s new tone, polished after an intense period of consultation with the industry and other stakeholders.

Filip Dierckx, Vice Chairman of BNP Paribas Fortis, acknowledged that Europe needs to move toward a US model, where banking funding and capital markets are more balanced. “Capital markets and bank financing should go hand in hand,” he said while encouraging his colleagues to take “a variety of measures” to adapt to the new market.

“I believe in capital markets,” stated Frédéric Oudéa, CEO of Société Générale and President of the EBF.

Speaking on condition of anonymity, a senior member of the banking industry told EURACTIV that the sector is ready to adapt, and does not perceive the capital markets union as a “threat”. However, bankers believe the Commission needs to better structure the process of setting up the capital markets union, expected by 2019.

>>Read: EU finance ministers asked to set Capital Markets Union priorities

Meanwhile, Commission officials said the arrival of the proposal will force banks to change their business model.

“If you don’t pay attention, [in a few years’ time] it will be you demonstrating like taxi drivers against Uber,” Oliver Gajda, Executive Director of the European Crowdfunding Network, told the bankers.

Gajda stressed that banks do not perceive the social pressure to move from a model based on profits to another one based on serving society. “One of the key motivations of crowdfunding users is the disappointment with the current financial players,” he stated.

Civil society organisations remain cautious about the forthcoming proposal. Christophe Nijdam, Secretary General of Finance Watch, said that the capital markets union represents “a big change” in the Brussels’ narrative, from regulating shadow banking to promoting it. 

In February 2015, Lord Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), unveiled a green paper as part of the process to establish a Capital Markets Union.

The aim is to develop a financing system to complement the banking system, unlock capital across Europe giving more investment choices, and establish a market whereby investors can use their funds across borders without hindrance. One of the concrete proposals is to make it easier to raise funds for the bloc's flagging economy through markets, rather than banks.

According to the Commission, in a fully functioning single market for capital, if EU venture capital markets were as deep as the US, as much as 90 billion euro more in funds would have been available to companies between 2008 and 2013.

The consultation on CMU also considers harmonising the market for covered bonds, securitisation and creating a single accounting standard for smaller companies.

>> Read: European Commission mulls super-regulator for capital markets

  • 18 February 2015: Commission publishes green paper and launch public consultation on Capital Markets Union (CMU)
  • 8 June 2015: Commission hosts public hearing on the “Next steps to build a Capital Markets Union”
  • 30 September 2015: Jonathan Hill expected to lay out "Action Plan" on CMU for the next five years
  • 2020: End of CMU action plan

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