Capital Markets Union, wait …. what?

In case you haven’t heard it enough yesterday, the European Commission unveiled its long-awaited Capital Markets Union (CMU) Action Plan.

Well technically they did more than that … On top of announcing their detailed and long-term plan to achieving better integrated and functioning financial markets in Europe, they also published a first package of proposals – a new framework for securitisation as well as a new regime to better calibrate risk for infrastructure investments by insurers. And if that was not enough (try and keep your breath on this …) they also launched a consultation on covered bonds, venture capital and a cumulative impact assessment of the agreed legislation passed in the last five years on financial services in Europe….well if that isn’t something?

But, before we dive into the significance of all of this – let’s start at the beginning:

Let’s go back: What was this all for again?

Jobs and growth, my dear Watson! Jobs and growth …

Since Juncker’s team came into office, almost a year ago, we have seen its motto being repeated over and over again and this is no surprise when you take a look at the EU’s current economic situation. To overcome the bleak economic outlook, Commissioner Jonathan Hill was given the task to use the potential of financial markets to complement bank lending, “unlock funding for Europe’s growth” and support the Investment Plan and in general make the financial world a better place.

With a Green Paper out earlier this year – the Commissioner for Financial Stability, Financial Services, and Capital Markets Union has certainly been busy trying to find ways to remove obstacles to investment and making sure that capital markets better serve end-users – whether they may be corporates, SMEs, investors or citizens.

And this CMU Action Plan: what exactly is it supposed to achieve?

Undeniably, what was published yesterday is quite extensive! From trying to improve funding and access to finance for SMEs, via encouraging infrastructure investments, boosting pension funds, insurance, and fund managers, to supporting retail and citizens’ investments and savings opportunities – all the while trying to remove legal barriers to cross-border financial services activities.

Source: European Commission

That said, yesterday’s CMU Action Plan also aknowledges the role of banks which finance 75% of the real economy in Europe. The Simple, Transparent, Standardised (STS) Securitisation proposal also proposed yesterday by aiming to increase credit availability and reduce cost of funding for banks stands as one of the proposals recognising that freeing up banks’ balance sheets will support bank lending.

In addition, it is also about deeper integration and financial stability. The end-game results being that more uniform and integrated capital markets are supposed to help Member States share the impact of economic shocks and strengthen Europe’s resilience.

More than that, it is about reflecting and recalibrating complex and (most of the time) inter-dependent financial services legislation. This second attempt at looking at the cumulative impact of recent texts will also set an interesting benchmark for the next few years.

So what now – and where do we go from here?    

 This is probably the million-dollar question everyone will want the answer to.

You could argue yesterday’s stream of publication stands as an undeniable success. And it does because it delivers on the political promise that Commissioner Hill made at the start of his mandate to have a sound plan in place to achieve a ‘true and genuine’ CMU by 2019. It is also ambitious with a first set of proposals on infrastructure and securitisation also published yesterday – which anchors CMU as a concrete and immediate project.

You could also be dumbfounded by all the rest of the actions set down in Lord Hill’s plan for CMU – from (possible & set) legislation, launch of studies and working groups, support to industry-led initiatives and ongoing recalibration work: it is a lot to do in a limited timeframe.  Remember Bolkestein’s 1999 Financial Services Action Plan … so 2019 seems perhaps quite ambitious to carry out all these (experimental) investigations to better integrate financial markets in Europe.

Delivering on what Lord Hill often refers to as the ‘classic single EU market project’ will take time though and involves a lot of actors beyond the usual financial services crowd. Insolvency law and securities ownership legislation will mean national Justice Ministries will have to get on board if this project is going to be a success.

By nature, it will be a step-by-step project whose tangibility and impact will be hard to define – especially when you have 28 Member States at different stages in the development of their financial and banking markets. Completing it all also won’t have a symbolic ending line – which was the case for Banking Union. There are no plans to establish a single EU supervisor for financial markets here as Lord Hill alluded to in his press conference (despite Juncker in the 5 Presidents reports calling otherwise).

What’s for sure is that keeping track of all these initiatives, and making sure they stay coherent with each other and in line with the CMU objectives, could already be difficult enough for the Commission. But when you think of the unfinished business for financial services legislation and what’s to come –  bank structure, the introduction of the Leverage and the Net Stable Funding ratios, an expected CCP Recovery and Resolution Plans to name a few – coherence could then be even harder to achieve.

At least, we can be re-assured that a plan exists and wait for the next wave of CMU-related regulation. The review of the Prospectus Directive – to facilitate SMEs’ access to financial markets – is expected as soon as November.

Sandrine Lapinsonnière