January 27, 2015 / 10:40 AM / in 3 years

Exclusive: EU aims to complete capital markets union by 2019

LONDON (Reuters) - The European Union will put in place its “capital markets union” by 2019, starting with quick wins like encouraging direct investment in businesses, an EU document seen by Reuters showed.

European flags are seen outside the European Commission headquarters in Brussels September 10, 2014. REUTERS/Yves Herman

The document, co-written by EU financial services chief Jonathan Hill, sets out a timetable for the first time on a core policy of the European Commission to help revive the bloc’s flagging economy.

Harmonising rules for capital markets to increase the trade in stocks, bonds and other securities is an important goal for the EU. Many countries on the continent have historically relied more on bank loans than on traded securities to fund their businesses, which can make them vulnerable to shocks to the banking sector. The EU’s executive Commission is due on February 18 to publish three papers to kick off its plans.

Sceptics say a fully seamless union of EU capital markets is impossible to achieve. Persuading the 28 EU member states to harmonise their tax and insolvency laws would be politically impossible. Britain, which supervises the EU’s biggest capital market in London, has made clear it will not hand over full supervision of the industry to Brussels.

But Brussels believes there are a number of important steps it can take to boost investment and make the continent less vulnerable shocks to its banking sector.

An initial “Green Paper” will set out several short-term initiatives for coming months, such as making credit information on smaller companies more easily available for investors to see.

A second paper will outline proposals to encourage high-quality securitisation of debt based on pooled loans, making it easier for banks to free up their balance sheets for more lending, the document said.

A third paper will look at how EU rules on prospectuses published by companies to solicit funds will be reviewed to make it easier for smaller companies to raise capital on markets.

“ACTION PLAN”

An “action plan” will be published in the second or third quarter of this year.

Up to 80 percent of funding for companies in Europe comes from banks, with the rest from markets, the reverse of the situation in the United States where market-based finance has helped it to recover more quickly from the financial crisis.

Chris Cummings, CEO of TheCityUK, which promotes Britain as a financial centre, said Hill is looking at a “sensible starting point” for the capital markets union (CMU) but major progress will take years.

“We can get some way down the track by 2019 but to have a capital market with the sophistication of the American capital market will be a much longer term project,” Cummings said.

The commission will also “work with the industry to develop a pan-European private placement regime to encourage direct investment into businesses,” said the document, co-written by commission vice president Jyrki Katainen.

Longer-term measures would include changing rules for asset management or pension funds and measures to boost household investment into capital markets, it said.

Investment levels in the 28-country bloc are 230 billion to 370 billion euros below the historical norm and spurring small changes in stock, bond and other markets could lead to significant benefits over time.

The EU document says there is a need to identify priorities for the medium to long term, “bearing in mind the need to balance ambition and political realism”.

The document makes no mention of changes to how EU markets are supervised, as Britain resists any attempt to create a new super-watchdog that would hold sway over London.

Policymakers in Britain are touting the CMU as something that London’s expertise in finance can exploit and provide a compelling reason for the UK to stay in the EU as it faces a possible referendum on membership of the bloc.

The Bank of England has described the CMU as a marathon rather than a sprint, but it could bring very large benefits if carefully planned.

Banks are already arguing that if Brussels needs their help to get the CMU underway then plans by 11 EU countries to tax financial transactions should be scrapped to avoid crimping the same markets policymakers now want to raise funds for growth.

Reporting by Huw Jones; Editing by Peter Graff and Giles Elgood

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