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Financing of the EU economy - Is the CMU on the right track?

Is the CMU on the right track?

By Bavagnoli Corso - Directeur du Service du Financement de l'Economie, Ministry of Economy and Finance, France


Last year, the EC issued its Action Plan for a Capital Markets Union (CMU). The rationale for this initiative is quite straightforward: the EU financing model relies heavily on the banking sector, and the ability of EU companies to fund their projects and activities largely depends from banks’ credit supply. This can be problematic when such a supply is constrained. Besides, traditional bank-finance, which is very efficient in a wide range of cases, is not necessarily best suited for specific funding needs, such as those stemming from high-growth young companies. Therefore, it is desirable to diversify our financing model so as to provide companies with a more mixed panel of funding supplies, which might better correspond to their specific needs: bank credit, corporate bonds, private placements, venture capital, insurer’s investments, etc.

It is through this business-financing oriented approach that we look at the first initiatives of the Action Plan.

Relaunching securitization in the EU is of course the first significant building block of the CMU, which should allow a fluid flow of capital between financial investors, the banking system and funding needs. The quick agreement reached within the Council is a welcome start; it is now urgent, for the sake of the development of the market, that the European Parliament makes quick progress on the adoption of the STS framework, and that the EC starts working with Member States on the prudential treatment of STS securitization on insurers’ balance sheets.

The second important step is the review of the Prospectus Directive. We consider as particulary valuable the introduction, in the proposed regulation, of an option for a new Universal Registration Document (URD). The URD will – combined with the ex-post supervision granted to frequent issuers – allow issuers to easily benefit from market windows in a volatile context. This will ease companies’ access to capital markets.

And that the EC starts working with Member States on the prudential treatment of STS securitization on insurers’ balance sheets.

Other initiatives are ongoing: we look forward to the conclusions of the call for evidence led by the EC earlier this year, or of the consultation on retail financial services, and more generally to the quick implementation of the Action Plan’s ambitions, including on insolvency law.

All these steps will contribute to a successful CMU. But, in our view, they may also require a deep industrial transformation of the EU financial sector: in particular, increasing significantly – and on stable basis – the flow a market-based finance provided to EU businesses implies to develop a rich and well-performing ecosystem of European financial players, combining large actors with a critical mass and new players with a strong intensity of innovation. That raises several challenges, among which two need to be underlined. First, allowing the EU industry to compete on a fair basis with international peers – this is the reason why France’s response to the EC’s call for evidence highlighted the importance for the EU to establish well-balanced third-country regimes. Second, encouraging the emergence of new forms of financial intermediation in order to optimize the functioning of funding supply. With this regard, we look very carefully at the development of electronic trading platforms (e.g. for corporate bond markets) or distributed ledger technologies.