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16th Nov 2019

Hill: Capital Markets Union will not swing UK referendum

  • Hill: 'Having a single market for capital ... is something that makes sense for Europe, and makes sense for the financial services industry' (Photo: Dave Collier)

Britain's European Commissioner Jonathan Hill said Thursday (5 November) that EU plans for a Capital Markets Union will not play a large role in ordinary citizens' decision how to vote in the in/out referendum on EU membership.

He also admitted the Commission has no guarantees that its plan to create a single capital market will create jobs.

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  • Commissioner Hill is in charge of selling the idea of a Capital Markets Union (Photo: European Commission)

“The honest answer is that for most people in the UK, as most people in any other member state, I don't think they are talking about Capital Markets Union over their breakfast cornflakes,” the finance commissioner responsible for the file said at a public event in Brussels organised by the European Policy Centre, a think tank.

“But if you talk to people in the financial services industry, which is obviously an extremely important industry in the UK ... they can see that having a single market for capital ... is something that makes sense for Europe, and makes sense for the financial services industry,” he added.

Hill is a former leader of the House of Lords and a member the UK's governing Conservative party. The UK will hold an in/out referendum on EU membership by the end of 2017.

Hill noted that a Brexit would affect the City because EU rules on financial services “control market access.”

“Obviously in my current job I see … how rules governing the single market are drawn up. … If you have no influence over those rules, I think that that is a pretty extraordinary position for Britain's financial services to find themselves in,” he said.

Repackaging loans and mortgages

Hill is in charge of advancing the Commission's Capital Markets Union, a set of plans aimed at freeing up capital to give the European economy a boost.

It includes a plan to promote securitisation, a financial practice which has become controversial since it led to the 2008 financial crisis in the US.

Securitisation is the repackaging of loans, mortgages, or other contractual debts, and then selling off the risk on those loans.

The Commission wants to introduce its own certificate for securitisations, because it estimates that the practice can generate between €100 billion and €150 billion in income.

The Commission has said its securitisation plan will benefit small and medium-sized enterprises (SMEs) in particular, although critics have expressed doubts about whether this causal relation exists.

“In terms of how it could help SMEs ... I think the main point would be that as a means of getting debt off bank balance sheets, and freeing up their balance sheets, that increases the ability of the banking sector to lend more directly to businesses and SMEs,” said Hill.

The Commission says its proposed standardisation of securitisations “should reduce operational costs for securitisations”, and that, in turn, “the drop in price should have an especially beneficial effect on the cost of credit for SMEs.”

But when EUobserver asked how the Commission is so sure that this drop in price will benefit SMEs, and not just be pocketed by the banks, Hill dodged the question.

“In terms of who will benefit from it, how will it work: The point I was making before, about the way that if it helps strengthen bank stability to get debt off their balance sheet, and then increase their capacity to lend, that is how you get the benefit into Europe's businesses and SMEs”, he replied.

We'll only know if it works if we try

The British politician did say the Commission has no guarantees the plan is going to work.

“The honest answer is: We'll only know when we take this proposal forward. … We'll only know if it's working if banks and others directly want to take it up”, he said.

He referred to the public consultation which preceded the legislative proposal and said banks are a “keen supporter” of the idea.

The consultation yielded 120 responses, of which 10 requested anonymity. At least a third of the responses came from the banking sector, with the investment management sector as second-largest group of respondents.

But even among the banks there were critical voices.

Barclays Bank said in its response “it is unlikely that identifying new investors through securitisation would create significant increased lending to the SME market.”

“The banking sector in most member states is not constrained in its ability to lend by capital availability, but rather by the ability to find businesses which match responsible lending criteria.”

“In this context, securitisation of SMEs is unlikely to be significantly beneficial for the market since it offers an alternative source of capital for term lending when the constraint is the lack of a widely available asset class suited to early stage and development risk,” the British lender noted.

Member states want to move quickly

The Capital Markets Union strategy and the securitisation proposal are on the agenda for next week's meeting of economy and finance ministers.

Member states are expected to adopt conclusions on the plans, which is a much quicker than usual response.

According to press agency Reuters, Luxembourg prime minister Xavier Bettel told other government leaders that “making swift progress on the legislative proposal on securitisation is considered to be of the highest priority.”

EU endorses controversial finance tool

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

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