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02 September 2015

What is CMU?

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What is CMU and what is it intended to achieve?

When Jean-Claude Juncker was elected president of the European Commission, one of the main planks of the programme he wanted to implement was capital markets union.  “I believe,” he wrote, “We should complement the new European rules for banks with a capital markets union. To improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding.”

What is Capital Markets Union? Graham Bishop’s personal definition

It is the smooth flow of capital from savers – at the savers’ own risk – to users throughout the European Union so both stakeholders benefit from cutting the cost of intermediation. The credit standing of users will range from outstanding to just-acceptable, and the maturity of transactions will range from overnight to decades. The financial institutions that intermediate these flows will be regulated by the EU’s single rulebook for all participants in financial markets. As savers are taking the investment risk, they must be suitably educated/informed but protected against non-investment risks.

This particular drive to create an entity labelled “Capital Markets Union” may be new but the concept goes back to the foundations of the EU. More specifically, the “1992 Single Market” programme included all the initial pieces of legislation that are now being modernised and upgraded. Ironically, in view of the forthcoming UK referendum, the original programme was conceived and spearheaded by Lord Cockfield – Prime Minster Thatcher’s appointment to the European Commission. So it seems fitting that Prime Minister Cameron’s nominee – Lord Hill – should be tasked with completing the work.

The goals of CMU are couched in terms of a technical/economic pillar of the strategy for growth and jobs. However, there should be no doubt that there are political implications. CMU would complete financial integration and bolster financial stability, as well as promoting the effective implementation of euro monetary policy in all parts of the eurozone economy. Crucially, it should profoundly de-centralise economic, and thus political, power because it would free up capital to seek the best returns. That would be a powerful liberalising influence – but the means of achieving it involve a single rule-book that would see EU-level regulators gain great power over market participants. Already, there are many calls to reinforce the power of the European Securities and Markets Authority (ESMA).

Every speech by Commissioner Hill reels off the long list of desirable goodies to hang on the CMU Christmas tree. Clearly, he feels there is great momentum in favour of the plan after his pan-EU tour and more than 700 replies to the consultations.

What is CMU not?

Naturally enough, the banks are fearful that their role as intermediators will be taken away. However,  there will always be a need for basic banking services. That said, they cannot expect to be allowed, once again, a licence to run up vast risks with patently inadequate loss-absorbing capital.

What are the barriers to a single financial market in Europe and why?

·  the general lack of trust of retail investors in financial markets and intermediaries due to the crisis

· actual barriers identified in the Giovannini reports on “EU Clearing and Settlement Arrangements”. As a member of that Group 15 years ago, I remain amazed that the private sector has removed its 10 barriers while the public sector has achieved little – beyond the admittedly-massive achievement of TARGET2-Securities

·  the lack of tailored treatment for infrastructure investments in capital requirements of insurers and banks

·  the fragmented market for risk capital in the EU

What is the timeline?

July 2014:  Jean-Claude Juncker is elected as Commission President - with CMU as a top priority. 

Feb 2015: Public consultation on capital markets union

May 2015: ECOFIN in Riga: Ministers welcomed the Commission priorities of reviewing the prospectus directive and taking forward the work on developing simple, transparent and high quality securitisations.

Sept 2015: CMU action plan published

4 Q 2015: Commissioner Hill stated that: “Early actions will include a comprehensive package on securitisation with updated calibrations for Solvency 2 and capital requirements regulation (CRR), the definition of infrastructure and revised calibrations for Solvency 2, and our proposals to review the prospectus directive.”

2016: Implicit later actions (but not all legislative) to tackle: the known barriers (see above); investor protection/retail education; crowd funding; peer-to-peer lending; credit information; SME financing; infrastructure as a new asset class; personal pensions; supervisory convergence; etc.

2017: The really hard bits? Proposals on company law, insolvency law, securities law, taxation (though short of full harmonisation)?

2018: Inevitable rush builds up to finalise level one legislation before the European Parliament elections

2019: Finishing touches by April - then Parliament dissolves and Commission effectively ceases pending new appointments


© Graham Bishop

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