22nd Mar 2018

EU wants to fast-track the capital markets union

  • London has benefited from being the EU's financial capital, despite it being outside the euro area. (Photo: Ralph .)

The UK's exit from the EU makes a union of the 27 national capital markets more urgent, the European Commission said on Thursday (8 June).

"As we face the departure of the largest EU financial centre, we are committed to step-ping up our efforts to further strengthen and integrate the EU capital markets", said commission vice-president Valdis Dombrovskis, who is in charge of financial services.

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Dombrovskis presented a mid-term review of the Capital Markets Union (CMU), a plan launched in 2015 to increase links between EU markets and develop financial tools in order to facilitate investments and boost the economy.

Most of the proposals presented so far deal with specific financial products, such as venture capital or insurances.

"The EU needs CMU today more than ever," said the review unveiled on Thursday. It insists that Brexit "reinforces the urgent need to further strengthen and integrate the EU capital market framework”.

With 751,000 financial sector employees and the industry's gross added value of £80.935 billion (around €93 billion), the City of London has been one of the main actors and beneficiaries of the CMU so far.

The City has been necessary to provide services for the rest of the EU, such as ensuring risk-management services and providing the necessary amount of liquid cash for transactions, notes the commission's review.

"It will become important post-Brexit for the EU-27 to build up its capital markets infrastructure," Pablo Portugal, a director at the Association for Financial Markets in Europe (AFME), a lobby group, told EUobserver.

“In doing so, we must avoid situations where Brexit could lead to decreased efficiency or liquidity in markets, or increased costs for pan-European participants”, he added.

New priorities

To take the CMU further, the commission presented part of its work on Thursday.

That includes working on the supervision of financial entities, developing a framework to tackle financial technology, insisting on "green" finance, and tackling the so-called "non-performing loans" (NPLs) – credit that is not being repaid by the borrower.

"These are all key issues and it is appropriate to prioritise them in the next phase of CMU", noted Pablo Portugal.

Supervision is closely linked with Brexit, which "strengthens the need for further integration of supervision at EU level", according to the commission.

FinTech, which uses new technologies to compete with traditional financial services, has also recently come under scrutiny from the EU institutions. For instance, a dedicated report was written by the European Parliament and a public consultation was launched by the commission.

And for now, the issue of sustainable finance will be dealt with by an expert group that has been set up at the commission. Legal proposals could follow at at a later stage.

However, the EU's €1 trillion worth of NPLs are more complicated to deal with, as solving them depends mostly on national competences and on supervision from the European Central Bank (ECB). But EU finance ministers are expected to move towards a common “strategy” next week to address the problem.

SME promises

The EU executive also promises a stronger focus on SMEs, by looking at how to push them to enter into stock exchanges and public listings. "The commission will review the regulatory barriers to SME admission on regulated markets", says the communication, which also mentions an upcoming report: "Barriers to SME listing".

A focus on small and medium-sized businesses has been a long-standing request from UEAPME, the EU federation representing SMEs in Brussels. However, the representative body was feeling disappointed by the announcements on Thursday.

Gerhard Huemer, UEAPME's economic policy director, told EUobserver that the mid-term review was “very weak and very vague", adding that "we do not expect much for SMEs".

In the first two and half years, there has only been two major proposals in the CMU plan: a bill to boost securitisation, and a plan to harmonise company insolvency rules.

The bill on securitisation – a financial tool that frees up banks' lending capacities – was agreed only 2 weeks ago, whereas the insolvency proposal is still under the scrutiny of the EU parliament and member states.

The other proposals were much more targeted, for example, on venture capital, insurance companies, or European Social Entrepreneurship Funds.

Finally, a few other draft files are expected before the end of the year, such as the the creation of a pan-European pension product or a framework for so-called “covered bonds” – a special kind of debt.

“Securitisation was the initial flagship project”, added Pablo Portugal. “Now that a political agreement has been reached on the securitisation framework, focus can move towards these other priorities”.

Brexit connection

In parallel to developing the CMU, the EU will have to deal with Brexit, which could also prove negative for UK financial markets.

London-based financial entities are able to operate throughout the entire EU, thanks to the "passporting system", a scheme that allows entities based in one EU country to carry out activities in the other member states.

But the intention of UK prime minister Theresa May to leave the single market has cast doubts on the possibility for a similar scheme in the future EU-UK relationship.

EU-27 leaders made it clear in April that the future framework should “respect” the current European regulatory and supervisory regime and standards.

“Actually, the British financial sector is already taking for granted that it will lose its passporting rights”, said a senior economist following the EU. He described this fact as being positive, highlighting that it would give de facto "clarity" to finance professionals on the way forward.

The commission is also working a on legal proposal to push for some euro-denominated clearing operations to be repatriated from London to the euro area.

“Clearing” is a process used for important financial transactions. It consists of setting up an intermediary between the seller and the buyer, in order to guarantee that the transaction can happen if one of the parties fails in the meantime.

Around three quarters of clearing operations in euros are currently done in London.

The draft text of clearing repatriation was initially expected around the end of the month, but it has been brought forward to 13 June – just before the start of the Brexit negotiations.

Correction: This article originally said that the gross added value of finance in London was £80.935 million (€93 million). The correct figure is £80.935 billion (around €93 billion).

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