A capital markets union (CMU) could be beneficial to the European economy, however successful implementation will require significant commitment from European Union member states, according to the Central Bank of Ireland.
Responding to the European Commission’s green paper on the CMU, the central bank said it generally supports the implementation of a union that will improve the safety and efficiency of Europe’s capital markets, provided that it addresses these aims in equal measure.
If this is achieved, the response said, the CMU could “provide sustainable and meaningful channels of finance to the European economy”.
A CMU could lead to better intermediation between lenders and borrowers, as national markets will be pooled at a common level. For corporates and small and medium-sized enterprises (SMEs), this could mean better access to affordable funding options, while lenders could channel funds through more reliable products.
It could also provide a solution to the fragmentation in Europe’s financial economy, however, the central bank suggested that, in the long term, this would not be possible without addressing the existing “fault-lines” between Europe’s capital markets.
The response suggested that many of the securities settlement issues between European jurisdictions are rooted in national restrictions and biases, and that a lack of depth in the markets has led to too much reliance on bank funding, and an increase in the cost of non-bank finance.
This will be a significant challenge for the industry to overcome, and will require significant commitments from all market participants, the central bank said.
Other issues highlighted were the lack of a strategy for tracking the safety and success of CMU developments, and the data collected with regards to this. The response suggested that there is currently an insufficient data infrastructure for this.
It also argued that the European Commission should be wary of relying too heavily on non-bank channels of finance, as this could put the economy at greater risk if one or more should fail, and pointed out that many of these channels fall outside of current regulation.
Finally, the response suggested that a more harmonised regime for alternative investment funds would be beneficial to a successful CMU, and that a regulatory framework for this would help to provide funding for the European economy, support financial stability and help to safeguard investors.
It urged regulatory convergence on this, pointing out that this would make it easier for fund managers to market on a cross-border basis.
Although the Irish Central Bank argued that these issues should be addressed, it acknowledged that a safe and effective CMU would be beneficial for the European economy as a whole, and committed to “working constructively” to help achieve a union.
