The European Commission wants to reform the European financing environment fundamentally. Similar to the situation in the US, capital markets are supposed to increase funding. Recently, the public Capital Markets Union’s consultation ended. The German Institute for Economic Research participated in the consultation, promoting financing through banks and criticizing the Commission’s ambitious schedule.
Banks remain essential
Building a Capital Markets Union, the Commission wants to increasingly channel investments into corporation and large-scale infrastructure projects. Amongst others, funding is supposed to be raised outside the European Union. Additionally, retail investor’s savings should be steered into assets returning appropriate returns. Apart from traditional bank financing, a wide range of capital sources need to be accessed.
Nevertheless, the Cologne Institute for Economic Research’s (IW) comments on the public consultation demands banks to keep their status as the key player in the financing infrastructure. “Only banks have the means and the necessary experience to adequately evaluate debtor’s creditworthiness”, states the Institute’s director Michael Hüther. Believing that a majority of small and medium sized entities will use the capital market in order to finance their expenses is tantamount to a utopia. Finally, local banks have insights into their customers’ business models – including its risks – that international investors do not have. Exclusively banks are able to offer tailor-made credit conditions. The emission of corporate bonds, according to the Institute for Economic Research, is much too cumbersome for small entities.
Apart from all these limitations, the IW’s financial markets experts emphasize that a Capital Markets Union is reasonable as a broader range of financing tools becomes available. Especially, alternative forms of financing – e.g. crowdfunding – can fill niches that are less attractive or too risky for banks.
A key point for the Capital Markets Union’s implementation is the recovery of the market for securitization. Securities are credit based financial instruments crucial for corporate financing.
However, the Commission’s schedule is extremely ambitious: “A Capital Markets Union cannot be established overnight”, says Michael Hüther. In the end, market participant need to build-up confidence – especially if it comes to cross-border investment and financing decisions. For a proper implementation of the Capital Markets Union, fundamental reforms of insolvency legislations and tax laws are required – supplemented by comprehensive rules of investor protection that do not spoon-feed investors.
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