Capital markets union. A proposal for action

aut Andrea Perrone *

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* Professore ordinario, Università Cattolica del Sacro Cuore.

The Capital Markets Union(CMU) is a plan of structural reforms adopted by the European Commission on September 30, 2015 which is aimed at integrating European Union (EU) capital markets. The CMU action plan sets out 33 actions to be implemented by 2019 and pursues two main goals. On the one hand, the action plan aims at channeling private savings into productive uses, with special reference to small and medium enterprises (SMEs) and infrastructure projects, and allowing new investment opportunities, greater job creation, and more economic growth. On the other, it is an attempt to integrate European financial markets to promote greater resilience to shocks, more liquid markets, lower capital costs, and, eventually, stronger competitiveness within the European economic space.

The need for a stronger European capital market is suggested by a twofold argument. On the supply side, banking has lost its traditional strength in financing the real economy. The reasons are well known: the monetary policy implemented in the past two years by the European Central Bank has dramatically lowered interest rates and, as a consequence, the intermediation margin; the combination of post-crisis prudential requirements with an increase in the amount tied up in non-performing loans has limited bank lending. On the demand side, the recession of the welfare state and the demographic trends in EU countries urge a new approach to social security: a more efficient allocation of household savings is often seen as the only alternative to the collapse of the traditional public pension system.  

The measures provided by the CMU action plan have multiple features. Some actions are on their way to being implemented, as is the case for the new regulation on simple, transparent and standardized (STS) securitization and the amendments to prudential requirement regulations for banks and insurance companies, aimed at easing investments in STS securitization and long-term infrastructure. Other measures affect existing regulations by improving or simplifying laws already in place, as with EU regulations relating to venture capital and social investments, and the Prospectus Directive. From a long-term perspective, the CMU action plan includes structural reforms aimed at removing barriers to cross-border post- trading, creating credit scoring systems for rating SME creditworthiness, and harmonizing insolvency and tax laws. Finally, some forms of increased supervisory coordination are sketched out.


2. The existence of capital markets depends on many institutional and legal preconditions. As Bernie Black famously put it, «that securities markets exist at all is magical, in a way». This magic is rare, though, and surely «it does not appear in unregulated markets». Accordingly, the approach taken by the CMU action plan is very reasonable: centralized market infrastructures, legal rules that ensure the effectiveness of equal treatment principles, and supervisory strategies modelled on the supranational character of both market and centralized infrastructures realize some of the institutional preconditions required for capital markets to exist.

At the same time, structural measures are both politically complex and a source of significant distributive consequences; therefore, it might be difficult to carry them out in the short or even medium term. In short, measures that are too sharply inconsistent with the current structure of the market would be exposed to the risk of a very costly political opposition, especially by banks. The same applies to national bankruptcy laws and procedures, which are deeply rooted in the legal tradition and resistant to change. Finally, measures related to governance by the supervisory authorities would often be very controversial.

Paraphrasing Robert Schuman's famous Paris declaration, therefore, the CMU «will not be created all at once, or according to a single plan». Rather, it might be more useful «that action be taken immediately on one limited but decisive point».


3. With this aim, a research group at the Università Cattolica del Sacro Cuore has articulated a possible concrete proposal. This proposal features a public-private partnership between the Commission and the EU banking industry, in order to create a pan-European credit fund, to be called Europe for Enterprises (E4E). The fund is intended for long-term financing of SMEs and features units traded on a secondary market with high liquidity. The E4E Fund could promote adequate critical mass (e.g.: € 500 billion) for long-term investments in SMEs by using a twofold strategy. On the one hand, it could recur to the "informational assets" of the national banking industry to overcome the otherwise insurmountable obstacles created by information asymmetries between investors and SMEs; on the other, it could allow retail investments by providing an easy exit through a liquid secondary market.

The proposal implies the establishment of a group of banks and asset managers operating in each Member State of the Eurozone. These banks and asset managers should be identified by national associations and would have tasks calibrated to the market size of the relevant Member State. Tasked with interacting with domestic SMEs and investors, this group should be coordinated by an elected board under the supervision of ESMA. The group would be assigned multiple functions. First, identifying, under uniform criteria for evaluating creditworthiness, the domestic SMEs which should receive financing (screening). Second, raising capital by marketing the fund units to domestic institutional and retail investors (marketing). Third, managing the fund over the life cycle of the investments (servicing). Finally, ensuring liquidity for fund units in the secondary market (marketmaking) through the use of specific trading and post-trading infrastructures.

In contrast to direct lending, the remuneration for banks could be ensured by a number of elements: fees for screening activity and arranging contracts, spreads from market-making activities, cost savings from the absence of requirements for loss-absorption capacity, and reputational benefits resulting from participation in a pan-European partnership. The proposal would also allow banks to maintain relationships with current customers. Asset managers would receive a management fee for servicing activities. Additional benefits could be created, if necessary, through EU-wide uniform preferential treatment concerning taxation or capital requirements, especially with regard to market-making activity. Such uniform preferential treatment could be implemented on the basis ofad hocregulations.

Particularly crucial with respect to retirement savings, investor protection could be strengthened by a number of already-existing measures. With reference to broker-dealers' conduct-of-business rules, the relevant strategies are well-known. Suitability rules in marketing fund units to retail investors, public supervision, and civil liability belong to the usual toolbox of investor protection. Well-tested tools already exist also with reference to risk diversification. The readiest examples are limits on the concentration of investments and the possibility of investing a portion of portfolios in less risky asset classes, according to the approach already provided for by the regulation on long-term investment funds (ELTIF). Innovative solutions might also be introduced with regard to both the monitoring of credit and the collection of bad debts. For the former, a possible option could be mandatory co-financing of SMEs selected for the fund by the bank which conducted the screening. As for the latter, a solution to be explored could be the introduction of uniform EU legislation that would provide fund investors with a substantive and procedural priority in debt collection and would preempt the national insolvency laws of each Member State.


4. The E4E proposal is not radically different from choices already implemented in EU law. In essence, the proposal is a kind of hybrid of the model provided for in the ELTIF regulation and the activities of the European Investment Bank.

True, this is an approach that explicitly integrates public policy and the private market, if not featuring some form of governmental control. But times are hard and perhaps they require it, in the belief that a cooperative effort according to the principle of reciprocity is in accordance with the traditions of the EU and certainly would work better than a compromise between antagonistic parties.