S&P report on EU’s Capital Markets Union
If the EU completes the Capital Markets Union, Europe can lay the groundwork for stronger, more sustainable growth in the years ahead, S&P Global said in a report published today.
We believe the CMU can turn the economic and financial tides in Europe by keeping savings on the Continent through a deeper equity culture, by changing the market dynamics for banks to pave the way for consolidation, and by facilitating finance for small and midsize enterprises (SMEs) and sustainable finance, which would foster innovation and advance the EU green agenda. All of this would help boost economic growth in the EU.
“Low interest rates are likely here to stay and risk reinforcing the reliance of the EU economy on debt,” said S&P Global Ratings EMEA chief economist Sylvain Broyer. “They might protect funding from bottlenecks but will not rebalance the European economy with more equity and financing for SMEs.” Moreover, low returns on euro-denominated assets might even divert the large pool of European savings from key investments at home and will not contribute to greater capital mobility in Europe. Low interest rates raise the case for moving ahead to complete the CMU.
The CMU will not be a zero-sum game, where asset managers and financial market infrastructure companies would be major beneficiaries and European banks the losers. The CMU would give a boost to European asset managers and financial market infrastructure companies–exchanges, clearinghouses, and central securities depositories–as more capital flows to capital markets from banks’ balance sheets.
“The CMU also offers banks opportunities to generate additional revenue as participants in the capital markets, and to manage their capital and credit risk more effectively,” said S&P Global Ratings credit analyst Bernd Ackermann. This would help banks alleviate the return on equity challenge they face with the implementation of the final Basel III reforms. Finally, the CMU could foster competition from large investment banks outside the EU that will likely trigger consolidation among large financial institutions in Europe.
“Growing momentum behind sustainable finance can help unlock the CMU’s potential,” said David Henry Doyle, head of government affairs & public policy, EMEA, S&P Global. By closely coordinating the CMU with the EU sustainable finance agenda, it may be possible to amplify progress on both initiatives. An EU framework for educating potential investors about sustainable investments could help link high European savings with the growing appetite for environmental, social, and governance (ESG), but also unlock foreign capital.
“Strengthening European SMEs, which appear to have less of an environmental impact, are embedded in their local communities, and act as a catalyst for innovation, serves both the CMU and the EU sustainable finance agenda,” said Cristiano Zazzara, global head of credit analytics at S&P Global Market Intelligence. To provide sustainable SMEs with the funding they need, we believe the creation of a centralised European exchange could help the transition from bank lending to capital markets financing. Making AnaCredit information available to a broader range or participants could increase transparency about SME financing.
“At the retail level, a deeper equity culture could yield bigger returns for both savers and investors,” said Craig J. Lazzara, CFA, Index Investment Strategy, S&P Dow Jones Indices. Over the last decade, a more balanced allocation toward equity markets instead of bank deposits would have increased the return of EU savings.
As far as equity investment is concerned, ample research shows that passive funds typically outperform active funds. This is particularly true once the performance of the funds considers survivorship bias. In that sense, the CMU can support the adoption of low-cost, transparent equity products by creating a consolidated tape and coordinated European equity close and by enhancing European Best Bid and Offer. Furthermore, increasing the transparency of products such as index-tracking exchange-traded funds may entice passive and active investors, improving liquidity and efficiency throughout Europe.
“Absent progress toward completion of the CMU, it will become increasingly difficult for the EU to break the vicious circle of high debt and low trend growth, with its savings increasingly flowing abroad to finance investment in non-EU countries,” Mr. Broyer said.