What Is Missing to Arrive at the Capital Markets Union
After the Banking Union, the Capital Markets Union (CMU) is another major piece for completing the financial unification of the EU. In 2016, the European Commission presented an action plan to create, by 2019, a true single market for capital funds through a process that would integrate the financial markets of EU member states. The idea is that a larger and unified capital market should translate into additional demand and supply of investment funds, thus leading to higher economic growth across the Union. The action plan foresees six areas of intervention aiming to: finance innovative ideas and startups, also by using new fundraising schemes such as crowdfunding, increase investment options for small investors, spur cross-border investment, support financing of infrastructure, strengthen the ability of banks to lend funds to the economy.
The ultimate aim of the initiative is to make the EU financial system not only more stable, but also more competitive, by rebalancing the relationship between banks and markets. The 2008 crisis and the 2010 sovereign debt crisis highlighted the fragility of a bank-centric financial systems. It's useful to recall that 99% of EU companies are small- and medium-sized, 90% being micro-firms. According to the European Commission, about 75% of the external funding of European SMEs comes from bank loans; moreover, European SMEs obtain five times less funding from capital markets with respect to US counterparts. The most critical aspect of a financial system where bank credit is the key source of business funding is that, when the credit channel freezes, production slows down, as does economic growth.
One of the most interesting areas of intervention concerns initiatives aimed at banks. This seems to be a contradiction, but the European Commission is aware that, even if measures of support and integration of capital markets are needed, banking credit remains a crucial source of finance, especially for smaller companies. Measures have therefore been developed to increase the banks' ability to raise funds from alternative sources (such as covered bonds and securitization); and this to prevent European banks from deciding to reduce credit to companies due to problems related to their ability to finance themselves on the markets.
In one of the entries we wrote for the encyclopedia Treccani Europa, we review the architecture of the CMU and discuss some of its critical aspects. A first general comment is that CMU implementation of CMU is going to be complex, due to the multiplicity of objectives and actors involved and the limited time left to complete the plan. A second critical aspect is the potential role of the CMU in addressing the problem of non-performing loands, something which is a key worry for many European banks. The CMU initiative, considering the extensive articulation of objectives and implementation measures, seems to us the appropriate setting for dealing with the issue of bad loans.
However, while the 2016 action plan provides for initiatives in line with this purpose (such as cross-national convergence concerning insolvency legislation), in our work we highlight the lack of specific measures for the development of an EU market for impaired loans. This is a serious gap in the Single Market project, which has among its stated aims to make banks and markets complementary. Only recently has the Commission taken a stronger position in this regard, and in March 2018 it integrated the action plan with a package of measures that seeks to tackle the problem of non-performing loans. Particularly interesting are the initiatives aimed at developing secondary markets where non-performing loans can be transferred in conditions of transparency and standardization, an essential prerequisite for a truly pan-European exchange of these contracts.