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28 may 2015

Capital markets union: the conditions for its success

The Capital Markets Union (CMU) is a European Commission project that aims to stimulate employment and growth by improving access to finance for businesses.


Relying on the strengths of financial-sector players

To be successful, the CMU must take into account the strengths and specificities of the European economy financing, which has a diverse range of markets and actors, including the universal banks on which this project can and must rely.

The financing of the European economy and European businesses remains heavily reliant on credit intermediation, which makes it fundamentally different from the US model. This financing model is changing as a result of new banking regulations driving disintermediation. But this change is taking place at different rates, depending on the size of the businesses. The challenge facing the CMU is to create the conditions for a successful shift to a new balance between credit and market funding.

French banks are keen to play a major role and recall the conditions essential for the success of this plan.

  • Developing market access for SMEs/ISEs
    The CMU must promote the emergence of a common framework for rating SMEs and ISEs and develop opportunities for financing in the form of a private placement regime in euros. This requires establishing best practices in order to attract international investors.
  • Maintaining a long-term lending capability
    The CMU must lay the foundations for a robust and transparent securitisation market in Europe, notably by defining a common label and relying, if it proves necessary, on guarantees from public stakeholders to improve the attractiveness to investors.
  • Safeguarding the ability of banks to support their customers on the markets
    The CMU must ensure that the local universal banks that support businesses on the markets can also provide liquidity through market making under economically viable conditions. In fact, this activity provides the liquidity necessary for orderly markets, allows businesses to obtain effective coverage and renders the Paris financial centre attractive to foreign investors.

Two pieces of legislation in conflict with the CMU

The structural reform of banks must be discontinued or radically revised to avoid penalising the essential market making activity. Failing that, the CMU will ultimately benefit non-European financial players only and will not open up the expected prospects for SMEs and ISEs. Furthermore, draft legislation separates their deposit activities and certain trading activities deemed potentially risky while several European countries, including France, have already introduced the legislative measures needed to increase the security of these activities.

The proposal for a financial transaction tax at the EU level (FTT) constitutes a major obstacle in the way of setting up and developing the Capital Markets Union. Proposed in 11 of the 28 Member States, this tax creates distortions of competition and therefore causes substantial tax fragmentation within the European Union.

The tax base is in the process of being defined. If it includes corporate equities and bonds as well as derivatives, it will have serious consequences for businesses by increasing their funding costs and restricting their access to market funding. It will also have disastrous effects on the Paris financial centre, which will lose competitiveness and jobs due to the relocation of a whole range of bank financing and customer activities. Even with a very low tax rate, the effects would be considerable in a climate of globalised and keenly competitive businesses.

The tax on financial transactions introduced in France in August 2012 resulted in a drop in transactions along the lines of 20% after its adoption and a 10% decrease over the medium term(1).


(1) AMF, April 2014

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