European Banks cannot fill the funding and investment gap that Europe needs – building a Capital Markets Union is part of the solution

Remarks by Brian Hayes MEP to the Annual RBS Macroeconomic Conference, Thursday 24th September, London

Europe has gone through close to a decade of falling investment and falling bank lending. Pretending to EU citizens that recently re-capitalised banks will suddenly become engines for dramatic growth across Europe represents dangerous group think. As the recovery has been painfully slow since the worst financial shock since the 1930s, so too will the ability of the traditional banking model be slow to fill Europe’s real investment needs. We need new solutions to finance the real economy.

Just as EU member states must get their deficits down by prudent fiscal decisions so too will Europe’s banks have to follow a slow and painful recovery path. Prudence and cautious lending will remain with us for some years as the entire banking sector tries to recover its confidence. The new EU-wide legislation put in place since 2009, should never again mean that EU taxpayers have to bail out the banking sector after reckless lending and light touch legislation that were such hallmarks of the last two decades.

Europe’s slow recovery is now underway. While doubts about the viability of the Euro project still exist, the currency has withstood the worst effects of the crisis and has grown from 18 to 19 Member States. All of the doomsday predictions in 2010 that the euro would break up have been proven to be groundless. Countries that were in the grip of a troika programme are now able to fund themselves from the market. The ECB has responded and its liquidity has helped to bolster the position of Europe’s banks.

I believe that the potential of developing a proper Capital Markets Union (CMU) during the lifetime of this European parliament and Commission must be a top priority. It’s an essential part of the Commission work programme and will represent a major part of the work of Parliament’s ECON Committee in the year ahead.

Through CMU, we have the capacity and knowhow here in Europe to make a transition from a funding model based almost exclusively within banks, to one where capital markets play a growing role in the funding of the real economy. Instead of a plan that divides Europe, in terms of Euro and non-Euro member states, a properly functioning CMU can work for all 28 together. It doesn’t have to respect the euro difference; it’s something that can unite Europe.

I suppose one of the major difficulties in Europe that policymakers currently have to deal with is the rising financing gap for businesses. The fact that in Europe our capital markets are not as developed as those in the US is a point of key concern. In the U.S., approximately 70% of corporate funding is through the capital markets while in Europe, it is the opposite – businesses heavily rely on bank lending here. And what’s more worrying is that SMEs don’t get the financing they require from banks. In the euro area, 35% of SMEs didn’t get the complete financing they asked their banks for.

We are at a moment of transition in Europe. The banking sector must become safer but that means it cannot operate at the same size it has in the past. Something must come and replace it. That replacement can only be investments that are channeled through the capital markets.

Developing a strong capital markets culture into the future

It is our task to examine what part we can actively take to ensure that capital markets can play in the provision of long term, sustainable and growth-enhancing finance in our future.

Capital markets are much more complex and diverse ecosystems than are the banking markets. There is a vast and sophisticated chain between the saver and investor and the company or a project that receives financing. We must also remember that capital markets are very different on a country by country basis.

Funding vehicles such as Venture capital and Crowdfunding are playing an increasingly important role in Europe but activity is still overshadowed by the U.S.

Over the past decade, European venture capital investment has been approximately one-fifth to one-third the size of investment in United States. Also, the number of venture capital deals in Europe is higher than in the United States, showing that venture capital firms in Europe are, on average, dispersing funds more broadly through smaller deals.

We must acknowledge that the CMU project will not come in the form of one piece of legislation. It will consist of a wide range of complementary measures which will probably involve re-examining existing EU legislation. But scrutiny from the Parliament and ECON Committee will be very necessary to progress this project in a meaningful way.

We have already seen some major movements from the Commission in relation to the Capital Markets Union – through the publication of the Capital Markets Union Green Paper and through the consultation on the Prospectus Directive and Securitisations. It is my understanding that Commissioner Hill will produce a legislative proposal on Securitisation in September 2015 followed by a review of the Prospectus Directive in November 2015. The signals of the CMU plan are already positive but ultimately we need the right approach between pragmatism and ambition.

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