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12th Nov 2018

EU unveils plan to copy US capital markets model

  • The European Commission wants EU firms to tap the stock and bond markets for finance as part of its blueprint for a capital markets union. (Photo: Alberto Carrasco Casado)

The European Commission set out a road-map to emulate the US venture capital markets on Wednesday (18 February), in an attempt to make it easier for companies to raise money from the stock and bond markets.

Financial services commissioner Jonathan Hill unveiled a Green paper fleshing out the EU executive’s initial plans to create a single market in capital by making it easier to access cross-border investment.

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The commission wants to increase business access to financing for infrastructure projects, cut the cost of raising capital and help smaller companies raise cash as easily as larger firms.

Hill said that despite the free movement of capital being one of the core freedoms of the EU, “we still don't have a fully functioning single market for capital”.

He added that the plan was about "unlocking liquidity that is abundant, but currently frozen, and putting it to work in support of Europe's businesses."

Harmonising the EU’s capital markets by 2019 and increasing the amount of cash European companies raise from the financial markets was one of Jean-Claude Juncker's main pledges during his campaign for the European Commission presidency.

The US venture capital market is about five times bigger than it is in the EU, and US firms generate eight out of ten dollars of investment from financial markets.

In contrast, European firms are reliant on conventional banks, who have become more reluctant to lend in the post-crisis environment, for around 80 percent of their finance. The commission argues that If European venture capital markets were at a similar level of development to their US counterparts, companies would have been able to tap €90 billion of additional funding between 2008 and 2013.

Use of the securities and bond markets, and other complex financial instruments, collapsed in the wake of the 2008-9 financial crisis, which was driven by a collapse in confidence in products known as ‘asset backed securities’ which mixed sub-prime mortgages with other assets.

However, Hill insisted that the commission plan was “not at all to revive the bad old days of the subprime instruments and the unhealthy practices of the past”.

“Our door will remain firmly closed to highly complex, opaque and risky securitisation instruments which caused the crisis,” he said, adding that the blueprint was “not about pushing banks aside, it is about complementing the role of banks”.

The three month consultation will be followed up by an ‘action plan’ and possible legislation later this year. For their part, EU finance ministers will discuss the plans at their meeting in Brussels in April.

The Green paper drew a mixed response.

Doerte Hoeppner, chief executive of private equity and venture capital group, ECVA, welcomed the plan, adding that “the EU should aim to free up the enormous pool of capital sitting with institutional investors."

Accountants’ advocacy group ACCA spokesman Jason Piper said that it would “pay dividends beyond the direct impact on businesses which access the new funding”.

Christophe Nijdam, the secretary general of Finance Watch, warned that “by promoting the investment and universal banking model via a revival of securitisation, the Capital Markets Union might promote the model that required a bail-out”.

Sven Giegold, the economics spokesman for the Green MEPs, commented that “a capital markets union with a one-sided and short-term focus on shareholder value is exactly what the EU doesn't need.”

EU to unveil capital markets plan in 2015

The EU commission will unveil plans to harmonise the bloc's capital markets in 2015 and reduce the reliance of Europe's businesses on bank lending.

SMEs lack support in EU financial plan

The European Commission's plan for a capital markets union is said to be aimed at small and medium-sized enterprises, but many could end up being left out in the cold.

EU endorses controversial finance tool

Commissioner Hill has announced he wants to revive the securitisation market, saying the practice has been "stigmatised" because of the 2008 US sub-prime crisis.

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