The new European Commission has signalled that it will work to create a ‘capital markets union’. This is understood as an agenda to expand the non-bank part of Europe’s financial system, which is currently underdeveloped. The aim in the short term is to unlock credit provision as banks are deleveraging, and in the longer term, to favour a more diverse, competitive and resilient financial system.
Direct regulation of individual non-bank market segments (such as securitisation, private placements or private equity) might be useful at the margin, but will not per se lead to significant capital markets development or the rebalancing of Europe’s financial system away from the current dominance by banks. To reach these goals, the capital markets union agenda must be broadened to address the framework conditions for the development of individual market segments.
Six possible areas for policy initiative are, in increasing order of potential impact and political difficulty:
- regulation of securities and specific forms of intermediation;
- prudential regulation, especially of insurance companies and pension funds;
- regulation of accounting, auditing and financial transparency requirements that apply to companies that seek external finance;
- a supervisory framework for financial infrastructure firms, such as central counterparties, that supports market integration;
- partial harmonisation and improvement of insolvency and corporate restructuring frameworks;and
- partial harmonisation or convergence of tax policies that specifically affect financial investment.