On September 30, 2015, the EU Commissioner Jonathan Hill launched the European Union’s capital markets action plan. This plan adds flesh to one of the key priorities of the EU Commission president Jean Claude Junker which is a Capital Markets Union (CMU) for all the 28 member states.
This is an ambitious objective with the proposed action plan targeting five key areas over the next three years: (a) facilitating financing for start-ups and non-listed companies, (b) improving the investment environment for long term infrastructure financing, (c) fostering retail and institutional investment, (d) leveraging banking capacity to support the wider economy, and lastly (e) facilitating cross border investments.
The EU’s CMU initiative is designed to complement the €315 billion European Fund for Strategic Investments (EFSI). Aware that EFSI funds are not sufficient to lift the EU economy from the low levels of economic growth, the CMU is envisaged to provide the required funding to the European economy over the longer term.
One of the motivations behind the setting up of a European CMU is to reduce the divergences between the US and the EU economies in this area. A study entitled Bridging the Growth Gap, written by the Association for Financial Markets of Europe in collaboration with Boston Consulting Group, highlighted that the US economy has performed better than the European economy since the crisis. The report identifies that one of the reasons for this is Europe’s low reliance on capital market financing. Compared with the US, European companies receive five times less funding from capital markets.
Compared with the US, European companies receive five times less funding from capital markets
A successful CMU would result in European enterprises finding it easier to raise finance on capital markets while at the same time seeking funding in an another EU member state would not be restricted by legal uncertainty and supervisory barriers. This vision is commendable and worth supporting in view of the positive ramifications this will have on the long-term growth of the European economy.
However, while the European Commission insists on the benefits it would bring to SMEs as a whole, the real beneficiaries from an EU Capital Markets Union would be large and mid-cap companies as well as innovative start-ups that are able to become Europe’s future multinationals.
It needs to be acknowledged that the vast majority of SMEs require relatively small amounts of financing that would not justify accessing an EU Capital Markets Union. Such financing requirements will need to continue to be serviced through conventional forms of financing, such as owner and bank funds.
It is therefore important from an SME perspective that a CMU complements European bank financing. The CMU’s action plan endorses this principle since it proposes to undertake a comprehensive review of the cumulative impacts of financial reform together with a review of the capital requirements regulation (CRR).
These reviews are welcome since they may present solutions to alleviate some of the restrictions faced by European SMEs when seeking bank financing in recent years. I believe that the frenzy to legislate following the financial crisis resulted in cumulative regulatory effects that are pushing banks away from financing SMEs. The recommendations presented in the cumulative impact assessment and the review of the CRR will be an interesting read for both banks and SMEs alike. We eagerly await their publication in 2016.
Mark Scicluna Bartoli is head of EU & institutional affairs at Bank of Valletta and is also responsible for Bank of Valletta’s EU representative office in Brussels.