Advancing the EU's capital markets union

The aim of the EU's Capital Markets Union (CMU) is to diversify funding sources for Europe's economy by facilitating more capital-markets financing. In the EU, traditional bank loans still account for 80% of all financing, whereas in the United States this figure is 25%. Moreover, at a time when regulations are impacting banks' balance-sheets in Europe--and their capacity to lend--it is important that the CMU project move forward with greater speed and align CMU implementation with that of banking reform. Otherwise there is a risk of a funding squeeze: regulation is putting pressure on bank lending, but the CMU infrastructure that would permit more funding via the capital markets is not yet in place.

Among the key areas that need to be speeded up in CMU discussions are securitisation, private placements, equity financing for SMEs, and infrastructure financing. And it is important not to lose sight of liquidity needs as CMU takes shape. A well-functioning market requires liquidity, especially in difficult times. To ensure liquidity, market-making by banks is vital. Measures that hamper market-making will result in reduced liquidity and a less-efficient, fragmented CMU. Some existing measures indeed merit reconsideration. These include the financial-transactions tax, especially if it is not universally applied; and current or targeted arrangements regarding Net Stable Funding Ratios, leverage ratios and capital charges for banks' trading books. 

There is additionally the need to preserve a level playing field among banks. The goal of CMU is not to replace banks, rather enable them to contribute to an optimal allocation of savings towards productive investment. The integrated business model of a number of European banks (among them BNP Paribas) is a perfect response to CMU. The model offers the benefits of an intimate understanding of SMEs and retail customers on the one hand, and strong distribution platforms on the other. Given the CMU's ambitious plans, it is important that European banks which have the capacity to both originate and distribute not be disadvantaged compared to non-European banks. The beneficiaries will be Europe's SMEs, issuers, investors, and indeed the entire economy.