Europe's economy is today about the same size as America's, but our equity markets are less than half their size. In the US, SMEs get about five times as much funding from the capital markets – or non-bank financing - as they do here. As ECMI has pointed out, compared to the US, EU households have more than double the amount of their savings in deposits, but half as much in investment funds and shares.
Bank based financial systems can have real strengths like the relationship that banks can develop with local companies. But the crisis showed that our capital markets were not developed enough to fill the gap left by a bank sector unable to lend at normal levels. European SMEs receive 75% of their funding from banks; European companies are four times more reliant on banks than American ones. So a drying up of bank lending like the one we experienced in 2008 had a devastating impact.
This in part explains why attitudes towards the idea of increasing the role of capital markets in the European economy has changed. I suspect that a few years ago, had I said that my task was to increase the contribution that capital markets could make in the European economy, some of you might have raised a quizzical eyebrow. Today, I am glad to report that CMU is strongly supported by all 28 member states, the European Parliament and industry. The mood has changed.
These challenges are what is driving me forward in my work to build a Capital Markets Union. We need deeper capital markets that can complement bank lending and support European growth.
At its most simple, a single market for capital aims to link savings better with growth. By building stronger, more sustainable capital markets, we could increase investment in our infrastructure; give businesses seeking capital a bigger choice of funding; increase opportunities for successful businesses to sell into bigger markets, reducing costs to consumers; and add to the options for people saving for the long term. And of course we could make the whole financial system stronger by diversifying away from Europe's traditional dependency on the banks. Evidence suggests the US bounced back quicker after the crisis thanks to a greater range of funding sources and deeper capital markets.
From the outset, I have been clear I wanted to build the CMU from the bottom up, step by step, rather from the top down. Why did I take this approach? First because I wanted to hear from others, particularly those active in the markets what steps they think we need to take to develop deeper capital markets and overcome barriers to cross-border investment. I didn't want an excellent blueprint but fail to make much difference on the ground. Next, and linked to that, I felt we needed to build confidence and generate momentum. For that to happen, we needed to identify some measures where we could make early progress and not get bogged down in institutional turf warfare. For me, being ambitious means getting things done quickly that will help make things better, not coming up with a plan that looks good on paper but stands little chance of being implemented. [...]
For companies in their start-up phase, I am interested in new funding methods ranging from money-lending and donor platforms, to investment-based crowd funding or support from business angels. For companies in early expansion phase deeper venture capital markets would offer entrepreneurs more options. I also want to look at how tax incentives for venture capital and business angels can foster investment into SMEs and start-ups.
We also need to improve the connections between retail and institutional investors, the fuel in the tank of the CMU, to our companies and infrastructure projects.
We need better information and advice if retail investors are to invest on capital markets. Information should be available in a form that can be compared across investment products. This builds on steps we have already taken, but to check they are working as intended we will undertake a comprehensive assessment of European markets for retail investment products, including distribution channels and related services. The assessment will identify ways to improve the legislative framework and decide on how we best exploit the new possibilities for new advisory services offered by online providers and fintech.
We have a European system that allows investment funds to operate across the EU – but we know it does not work as well as it should. We have 36 000 UCITS funds in the EU, four times the number of mutual funds in the US, and of a much smaller average size. So I want to create a proper European passport system for investment funds to increase competition and choice for European citizens.
Personal pensions have the potential to inject more savings into capital markets and channel money to productive investments. Yet the EU has no single market for voluntary personal pensions. This means we are missing out on economies of scale which in turn limits choice and pushes up the cost for savers.
Next year, we will start the work to determine exactly what is needed to establish a European market for simple personal pensions. And clarify whether or not EU legislation can help to underpin that market. [...]
So we will consult on the key differences between insolvency and early-restructuring regimes across the EU. By the end of 2016, we will bring forward legislation to align insolvency proceedings better across the EU. We will also seek to address the current bias in our tax system that makes it cheaper to issue debt rather than equity.
We will work with the European Supervisory Authorities to strengthen supervisory convergence and keep a careful eye on the possible emergence of any new risks. Wherever you operate in Europe the rules of the game need to be consistent so that financial stability is safeguarded. [...]
We are keen to encourage more long-term investment in infrastructure by institutional investors. So we will define what an infrastructure investment is under our prudential legislation – Solvency II - and lower the capital requirements associated with it by 30%.
Insurance companies have almost 10 trillion to invest in the European economy. At the moment, less than 1% of these funds are invested in infrastructure.
We want to relaunch European securitisation markets, in order to help diversify funding sources and free up bank lending for the wider economy.
To do that we have proposed a new framework to encourage the take-up of simple, transparent and standardised securitisation. This will define a set of criteria and apply lower capital requirements when a securitisation meets those criteria. If we can rebuild the securitisation market to pre-crisis levels, that would amount to an extra EUR 100 billion of investment for the economy.
We want to help SMEs get financing on capital markets. As part of that we will overhaul the Prospectus Directive. Prospectuses need to give investors clear information. But they also need to be affordable for SMEs to produce. We will propose a radical review before the end of the year.
We are also working on a package of measures to support venture capital. At around EUR 60 million, the average European venture capital fund is only half the size of that in the US, and around 90% of EU venture capital investment is concentrated in only eight Member States. In short, European venture capital lacks scale, diversification and geographical reach.
We will start by amending the Regulations on Venture Capital Funds and European Social Entrepreneurship to make it easier for more funds to participate, and be active in more investments.
To access large pools of international capital an enable more European projects to be financed, we are also taking forward work to develop a pan-European venture capital fund of funds.
We have also launched a call for evidence on the cumulative impact of rules in the financial services sector. Over the past five years, we had to legislate at speed while the fires of a crisis were burning all around. And as a result the financial system we have today is stronger. No one is putting that overall architecture into question. [...]
We also need to look at ways of encouraging retail investors to invest. So later this year I will be publishing a Green Paper looking at ways of increasing choice for consumers and of increasing the cross border supply of retail financial services. We need a system built on transparency, competition and choice that takes into account the development of digital services.
I think of CMU as a classic single market project, a project for all 28 Member States. The measures in the Action Plan set us on the path to do just that. It takes a long term view but aims to build the Capital Markets Union step by step - working with industry, Member States and the European Parliament - to identify problems and barriers and then overcome them. [...]
The scale of the difference we could make? If securitisation could be safely revived this could free up a 100 billion euro of extra credit to the private sector. If we could grow equity markets across the EU to bring the smaller ones up to the European average, 25 billion euro of additional capital could be raised each year. And there is great potential for growth in Europe's venture capital market that is a fifth of the size of the US and in our private placements market that is half the size. [...]
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