Richards: steps towards EU Capital Markets Union should be taken as soon as possible

The European Union’s initiative to create a Capital Markets Union in Europe is currently stuck in a quagmire of political debate. That shouldn’t discourage politicians and regulators from taking the necessary steps as soon as possible, according to a new report by the International Capital Markets Association.

Originally intended as a means of encouraging economic growth in the EU, the Capital Markets Union project took a step forward in September when the Commission released a 33-point action plan on how the project would be realised. However, since then insolvency reform, securities law and withholding tax have proved politically intractable and progress has stalled.

“The potential benefits in the long term mean that it is important to take the necessary steps as soon as practicable,” said Paul Richards, head of regulatory policy at ICMA. “Capital markets in the EU need to be competitive not only with other forms of financing but also competitive internationally.”

ICMA points to the faster economic recovery in the US than in the euro area. The organisation is concerned about divergence of policies between the US and Europe. It also warns that within Europe, there are still several barriers to cross-border capital markets business, including higher post-trade costs, differences between national laws and the planned financial transaction tax which is still being pursued by 10 member states in the euro area, despite being ‘not consistent with the objectives of EU Capital Markets Union’. The tax has been widely criticised as an ineffective measure which will hurt the very market participants it is meant to protect.

A further issue is that some capital markets products such as securitisation are not as developed in the EU as the US; while the capital markets union project aims to address this through new legislation that aims to improve transparency and increase standardisation. However, ICMA says that standardised securitisations will need to be linked to a reduction in capital charges that outweighs increases in capital charges elsewhere as a result of the Fundamental Review of the Trading Book; in addition, a fail-safe procedure needs to be developed for deciding whether a securitisation is standardised or not.

“If successful, the revival of the securitisation market, through sales by banks to investors, should free up bank balance sheets for more lending to small businesses,” added Richards.

There are further problems in the corporate bond market in the EU, which has suffered from declining liquidity and widening spreads. ICMA believes that the market-making model for secondary market liquidity has been broken, and it is not yet clear what will replace it. The sell-side acting only as an agency broker will not provide liquidity, the association warns, while asset managers may not be willing to take over market-making functions. It is also unclear whether trading on electronic platforms will create liquidity or not.

“The timetable for implementing the Commission’s Action Plan on Capital Markets Union makes it clear that progress can be expected in the EU on some issues in the short to medium term,” said Richards. “But the most important issues – like insolvency reform, securities law and withholding tax – have previously proved politically intractable, and will take a long time fully to resolve. They will need to be resolved in order to complete a single capital market across the EU. The full impact of Capital Markets Union on EU growth and competitiveness is therefore likely to take a long time to work through.”

The full report from ICMA can be seen here.