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Reintegrate the financial services sector into polite society: Lord Hill's views on the Capital Markets Union

17 April 2015
Giada Vercelli

“Reintegrate the financial services sector into polite society.” Reigniting economic growth through job creation is Lord Hill’s main objective in his push towards the creation of a European Capital Markets Union. It may seem a far-fetched target, if one listens to the majority of voters’ opinions on the way the City of London operates. With the electoral campaign in the UK heating up, and the tangible risk of a vote on Europe should a Conservative coalition emerge, the European Commissioner’s ambitions may be short-lived. A Brexit would dent his effort of presenting London as a “gateway for investment across the world into the European Union.” London is an asset to the wider European economy: from the City, investment flows out across Europe. There is more than 2 trillion dollars of lending from UK banks into other European countries and over a third of UK private equity fund investment goes elsewhere in the EU, Hill told a Canary Wharf audience gathered at Thomson Reuters today. Such a vital centre of expertise excellence has to be supported by financial stability, a fundamental prerequisite to achieve employment and economic growth. The challenge is to strike a balance between the implementation of international regulations and the encouragement of a healthy risk appetite.

This is a balance that the financial system is spontaneously seeking, as proved by the unstructured development of unregulated platforms in the disruptive technology space, for example. Lord Hill has yet to prove that the market’s natural strive to improve capital flows can be harmonised without being repressed, and can be standardised without preventing market niches reaching their full potential. With nearly 24,000 Europeans out of work, there is a sense of urgency. The 350 billion euro investment plan launched by the Juncker Commission, the free trade agreement, the push to expand the single market in structural areas such as energy, digital services and the Capital Markets Union, are going in the right direction. In order to “reintegrate the financial services sector into polite society,” as Hill puts it, a true single capital market has to tackle financing of SMEs: trade credit, venture capital and new sources of funding such as peer-to-peer lending and crowd funding. Corporate governance issues span the entire corporate world: from SMEs, large companies and financial institutions. An inclusive policy will have to put a hand on financial structures: bank versus bond finance; equity versus debt finance; and short versus long-term finance, including infrastructure finance. The inclusion of institutional investors such as pension funds and insurance in infrastructure investment is a key priority in Hill’s plans. However, regulatory disorders arising from the regulation of banks, pension funds, life insurance companies and other financial institutions must be addressed, as many in the Canary Wharf audience observed.

This has to be a project for all 28 member states, and Hill claims to have support from across the European Union.  In particular, it may offer ready-to-go solutions for countries where the capital markets are yet to be developed, such as the Eastern European countries. As the ongoing roadshow of the pan-European private placement market is proving these days, it may be more of a challenge to try to harmonise documentation and procedures for existing, successful private placement markets such as the ones thriving in Germany, France and Italy. “It is not another Banking Union for European members only, because it addresses a different set of challenges,” Hill clarified. “The Capital Markets Union is about eliminating obstacles to cross-border investment, giving funds to where they can be most productive. It is about complementing the role of banks, not displacing them. And it is about increasing the choices for financing at different stages of the life-cycle of businesses.”

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