WEEKLY COMMENT 1-10-2015
By Barry Edwards
EU Capital Markets Union
The EU published on the 30th of September 2015 the paper entitled ‘Capital Markets Union’ which explains their plans to unify and coordinate all 28 member countries’ capital markets rules and regulation to improve and enhance the access and management of finance for business. It is a comprehensive plan to help expand the range of funding methods for infrastructure projects and companies, especially small and medium sized businesses (SME’s), and to improve the availability of financial products for investment by funds and private citizens. If you click on the link below, you can read the full report, it has 30 pages;
I recommend that you have a look at the introduction and summary of action to be taken at the end of the paper at least. The report summarises its ambition very simply;
“Capital Markets Union will strengthen the link between savings and growth. It will provide more options and better returns for savers and investors. It will offer businesses more choices of funding at different stages of their development.”
“A Capital Markets Union should move the EU closer towards a situation where, for example, SMEs can raise financing as easily as large companies; costs of investing and access to investment products converge across the EU; obtaining finance through capital markets is increasingly straightforward; and seeking funding in another Member State is not impeded by unnecessary legal or supervisory barriers.”
The EU gets a lot of criticism for all sorts of things but this is one example of where proper coordination can make a real difference and more importantly provide the funding for growth that is desperately needed.
The capital markets in most European countries are not utilised as efficiently as in the USA and are definitely not extensive in their application for raising funds for businesses. Changing this whole perspective will make finance more available but the main problems are the diverse rules and regulations throughout the EU and the processes for winding up failed companies. Simplifying the information required for issuing prospectuses and making sure the advice is available at the right price is also very important. This report addresses all these problems and plans to complete the unification task by 2020.
All the EU organisations involved are fully behind the plan and there should be very little delay in implementing the changes when they are agreed. It is a pleasure to see the mechanism of the EU working effectively and making plans to achieve something that will demonstrate the purpose of the union rather than constant disagreement over a wide range of subjects. In this particular instance, the UK will be a major force in the formation of the procedures to make this happen since the capital markets in the UK are far more advanced than any other country. This is one example of the benefits of membership of the EU and specifically where the UK has some special influence; it is a pity there are not more examples of this cooperation.
Another aspect addressed within this report is securitisation. This subject was the main cause of the financial crisis emanating from the USA with the problems of ‘sub-prime mortgages’ and the regulations brought in after that devastated the market in the EU. The European Central Bank (ECB) and The Bank of England (BofE) have been promoting the re-establishment of an effective securitisation market to help with packaging up loans for SME’s and personal credit to extend the funding capacity of banks. This report agrees with this argument and proposes that the rules are the same in all EU countries to expand the market extensively.
Alternative finance is another approach the report mentions especially ‘peer-to-peer’ lending and ‘crowdfunding’. This market is beginning to grow throughout the EU but is mostly concentrated in a few countries and mainly in the UK. The European Commission is actively researching this market and is proposing that eventually rules and regulations should be established to allow it to grow into a real funding source competing directly with the banks. In the USA, the market is expanding rapidly and also changing from being funded by small contributions from private individuals to institutional finance which has transformed the concept into ‘marketplace lending’.
This trend is very likely going to catch on quickly in the EU and the Internet based structure will become a real force in funding smaller companies because of the higher yields it can offer fund managers. The speed at which this market develops will depend on the availability of information that is obtainable about these businesses which is another subject this report wishes to improve throughout the EU.
In my view, there is not one major area of finance the report has omitted and it is a very comprehensive analysis of the whole market. It would be great to see the proposals being implemented as soon as possible allowing the full potential of the companies within the EU to be developed.
That’s all for this week, more observations next week.