European CMU Needs to Widen Investor Base

Terry Flanagan

Niall Bohan, head of unit for Capital Markets Union at the European Commission, said investor capacity in the region needs to increase for the project to be successful.

Bohan spoke yesterday on a panel at Clearstream’s third Exchange of Ideas conference in London which focussed on the European Commission’s initiative to integrate the capital markets of the 28 member states by 2019. The aim of the CMU project is to diversify funding in the region away from banks and help grow private debt and equity markets.

“We want to grow venture capital and angel investing which we have not succeeded in building in Europe,” Bohan added. “We need to move beyond flying the economy on the one wing of bank credit.”

In the U.S. banks provide only 20% of business finance compared to 70% in Europe. The Commission has said that US stock market capitalisation was 138% of GDP in 2013 versus 64.5% in the EU in 2013 and that the stock market capitalisation in China exceeds that of the EU relative to the size of the economy. The U.S. private placement market and the U.S. corporate debt securities markets are also almost three times bigger than in the EU according to the Commission.

Bohan added that in order to move way from bank financing, there needs to be a broader investor base in Europe.

“We need to empower the life insurance sector and pensions to take more equity and retail investors need to move off the sidelines,” he said. “Transparency is the key so investors can quickly find information.”

Bohan said CMU is an ambitious project but the Commission will take a pragmatic approach. He said: “We will select the few initiatives where we can deliver and make a decisive push on bottlenecks that are holding back cross-border investment.”

One priority may be the changing the prospectus and admission requirements for companies that want to go public.

Trade organisation TheCityUK said in its response to the CMU consultation that the Commission needs to focus on five key priorities – calibrating prudential requirements so they appropriately reflect risk; encouraging member states to undertake structural economic reforms; sharing best practices about how to make information about small and medium-sized enterprises more easily accessible and widely available; reviewing how well-served retail investors are across the range of investment products and enabling investment flows in and out of Europe by facilitating international regulatory convergence.

The FIA European Principal Traders Association said in its response to the consultation that the financing of non-financial SMEs through capital markets is often linked to the presence of small and medium banks, investment firms or collective investment schemes who may be more motivated than big financial institutions.

“In the last five years, the EU has promulgated an almost unprecedented amount of markets regulation,” added the FIA European Principal Traders Association. “A review should be designed to ensure that market participants critical to the functioning of markets are not overly hindered by legislation.”

The association’s recommendations include ensuring that equivalence decisions are granted in a timely manner and obstacles to participation in European markets by third country firms are avoided; that market regulation promotes continuing innovation and the development of new technologies; that market-making models are not made uneconomic and that there should be non-discriminatory access to trading venues.

Related articles

  1. Deutsche Borse-LSE Merger in Focus

    Archax is the UK’s first regulated digital securities exchange.

  2. Investors can take into account firms' impact on nature in addition to traditional ESG metrics,

  3. The fund manager recently announced connectivity between Coinbase and the Aladdin platform.

  4. New Emir Reporting Requirements Kick In

    MFA says proposal will impair managers' ability to deliver for investors.

  5. Jacobi Asset Management has hired an ex-BlackRock executive as its new CEO.