As key political faces change in the EU, thoughts inevitably turn to new plans and projects for the future. When it comes to the big issues in finance, though, little fresh regulation or legislation is required. Instead, we need to focus on fixing what’s already there.
The Capital Markets Union and Banking Union were introduced to make the continent’s financial system safer, more flexible and better integrated. But they have yet to deliver fundamental change.
Take the Capital Markets Union. Its express purpose was to reduce the corporate sector’s reliance on bank lending, but it has yet to have much effect. According to recent data, only 14 per cent of corporate funding in Europe comes from capital markets. That number doesn’t exactly portray ‘efficient capital markets’. Cross-border investment is limited, and banks are required to do too much of the heavy lifting for corporate funding.
Changing this picture is important for a number of reasons. At a time of economic uncertainty, corporates of all sizes would benefit from a wider array of funding sources, and more liquid capital markets. More euro-denominated issuance would raise the profile and power of the currency, both in home markets and abroad.
Perhaps most fundamentally, improved capital markets can further EU integration. An increasingly diverse map of financial centres across the continent is developing – Paris, Milan, Frankfurt, Dublin, and others. Each has its own specialism, and with an effective Capital Markets Union acting as an overlay, they could interact and cooperate much more effectively. Cross-border flows, both in trade and finance, would be increased, and regional economies boosted. Creating regional centres of strength would elevate the financial standing of the EU when set against the other major economic powers.
Globally, there is a lot of concern around financial market fragmentation. It seems odd to still be tackling this same problem in the EU, under a single currency, a single market and a single overall regulator. For banks present across Europe this is a particular concern.
Patient tweaks, not sweeping change, will bring the most reward
The Commission, national regulators and central banks should be working together to encourage good policymaking – supporting local capital market initiatives and working out how best to knit together regional efforts where scale is needed. Europe’s financial centres should open a dialogue on how to up their capital markets offering and take advantage of their specialisations.
At the same time, the Commission could free up cross-border bank lending by finishing the Banking Union. This will be a tricky process, requiring agreement on some form of deposit backstop scheme and a host of other issues. However, it is a critical priority, as it will finally put financial stability on a much broader footing within the Union.
The private sector also has a role to play in financial reform. It may sound strange for someone in the banking industry to say this, but European financial markets have been too focused on debt for too long.
Debt issuance isn’t suitable for every funding situation or every market participant. To address this, there is a desperate need for a more developed equity investment culture in Europe. Without this, the Capital Markets Union will be operating with one hand behind its back.
Europe needs to keep creating growth and encouraging innovation. That means taking risks. Investors should be willing to accept equity risk, and entrepreneurs should be willing to offer it. As the EU looks to lead global efforts on the transition to a lower-carbon economy, a greater role for equity investment should unlock more funding for sustainable projects in the private sector.
This is a long-term goal, but the work to get there can begin now, using the tools the EU already has at hand. When new leaders come to the fore, there is always a temptation to think big and act boldly. But when it comes to finance, the EU needs to make what it already has work better. Patient tweaks, not sweeping change, will bring the most reward.
James Emmett is chief executive officer, HSBC Europe and HSBC Bank plc.