Has the pandemic given a boost to the Capital Markets Union?

Through Adam Farkas, Chief Executive Officer, Association of Financial Markets in Europe (AFME)

This article originally appeared in the Fall/November 2021 issue of International Banker

Since the launch of the European Commission’s (EC) Capital Markets Union (CMU) project six years ago, many agree that progress has been slow and not without challenges. Fast forward to today: European Union (EU) capital markets may have finally reached a turning point. Despite the economic challenges caused by the COVID pandemic, European capital markets have shown resilience, providing vital financing to businesses and small and medium-sized enterprises (SMEs) at record levels.

While the wave of corporate bankruptcies initially feared has so far failed to materialize, we must not be complacent. It remains to be seen whether this record performance will continue as economic and market conditions normalize following the gradual withdrawal of far-reaching fiscal, monetary and regulatory support measures. European capital markets are also still far from reaching their full potential relative to the size of the economy, and significant investment needs to support growth and a sustainable digital transformation lie ahead.

Record Capital Market Funding

Over the past year, capital markets have increased the supply of finance to businesses to an extent not seen in recent years. Our recent report on the progress of European capital markets showed that the proportion of market-based funding for EU businesses reached a record 16.8% of total funding in the first half of 2021, up from 11.8 % in 2020. European SMEs have also benefited from higher levels of venture capital. In fact, while absolute levels remain below those of the United States, Europe is the fastest growing region of the world in terms of private capital investment, with investments in European SMEs having multiplied by 2.4 this year.

However, as government support measures are withdrawn post-pandemic, financial pressures are expected to increase for many businesses. According to a report by the Association of Financial Markets in Europe (AFME) published earlier this year, European companies need to bridge a €450-600 billion capital gap to avoid widespread defaults and losses. jobs, as state support COVID-19 measures are gradually reduced. In this regard, stock markets and hybrid capital instruments can play an important role in providing fresh capital to companies to help ease debt burdens or to invest in growth and innovation.

Growth of sustainable finance

Sustainable finance has also been a notable area of ​​success for Europe over the past year. The environmental, social and corporate governance (ESG) debt markets have seen remarkable growth, with issuance levels no longer representing a niche market sector but now representing an important market segment. In the first half of 2021, ESG emissions increased by 69% compared to 2020.

A more detailed look at Europe’s ESG performance shows that German issuers provided the largest volume of green bonds in 2020 and the first half of 2021, partially supported by the successful origination of three green bonds bunds and a green bobl (federal bond) by the German government. Spain, Italy, the United Kingdom and the European Commission (on behalf of the EU) also issued heavily oversubscribed inaugural green sovereign bonds in 2021, and the European Commission’s SURE program has successfully contributed to the growth of social bonds over the past year.

However, like the provision of finance to companies, ESG markets must prove that they can effectively raise capital to support the objectives of the European Green Deal. In its new Sustainable Finance Strategy, the Commission has estimated that an investment of €480 billion each year will be needed to meet the 2030 emissions reduction target. While the EU is a global leader in issuance of green bonds, it is clear that public financing is insufficient to meet the necessary financing volumes, and capital markets play a key role in facilitating the transition to a carbon neutral economy.

Sustainable finance policy has the power to improve the tools banks use to make investment decisions, such as ESG disclosures and ratings, and attract more participants to ESG markets by building integrity and confidence in the market. Disclosure rules, in particular, should be developed consistently across the EU and in close cooperation with global standard setters. It is also crucial to have a clear definition of sustainability, which the EU taxonomy aims to achieve. For many companies, there will be a gradual transition to more sustainable business models. The taxonomy should therefore not only include activities and entities that are already low carbon, but also take a forward-looking perspective to include companies, their assets and activities that have the commitment and potential to transition into scientifically determined thresholds.

Resolve long-standing issues

Although the growth in market funding paints a positive picture, European capital markets continue to face long-standing structural challenges. For example, securitization issuance has fallen significantly in Europe and remains below the levels seen before the introduction of the EU’s Simple, Transparent and Standardized (STS) securitization framework. In contrast to the US, the proportion of EU securitized products and loan assignments to total outstanding loans has steadily declined over the past three years, demonstrating the banking sector’s limited ability to transform loans in negotiable securities. In addition, annualized securitization issuance in the first half of 2021 was 29% lower than at the end of 2018. Europe needs a well-functioning securitization market to enable greater risk transfer from banks to banks. markets, allowing banks to support new lending.

In addition, there is also a need to focus clearly on measures that will enhance the attractiveness, efficiency and integration of EU capital markets. Regarding the health of European equity markets, listing rules should be reviewed to promote equity financing and attract high-growth SMEs and large companies to public markets. The European initial public offering (IPO) market still lags the US. Between the first and third quarters of 2021, EU IPO issuance reached €35 ​​billion, compared to €214.4 billion in the US over the same period. If the European IPO is to catch up with that of the United States, European companies must be incentivized to issue on the continent by creating efficient capital markets.

It is also essential to support a strong and competitive trade and post-trade ecosystem in the EU. In this regard, the establishment of a consolidated band (or price comparison tool) for equity and bond instruments could be a catalyst to increase investor participation and democratize access to markets. Europeans. This would provide all investors with a comprehensive and standardized view of the European trading environment. Meanwhile, major inefficiencies still need to be addressed, such as the lack of a common EU-wide system for withholding tax relief. This is an example of friction that has a significant negative impact on financial markets and cross-border investment.

What future for the CMU?

In November, the Commission will announce new proposals to “put the CMU back in the spotlight and create momentum behind it”. These will be important in ensuring that the positive trends we have seen this year continue under normal market conditions. As Europe emerges from the shadow of the pandemic, it will also be important to start effectively tackling the long-standing obstacles that we know exist. While the CMU project may have received a much-needed boost from the markets this year, progress cannot be taken for granted.

(In October 2021, AFME published a report in partnership with 10 other organizations that track the performance of European capital markets in the first half of 2021. “Capital Markets Union Key Performance Indicators – Fourth Edition European Capital Markets – a Turning Point”.)


Adam Farkas is the Managing Director of the Association of Financial Markets in Europe (AFME). Having joined in February 2020, he is responsible for providing vision and shaping strategy for the future of the Association. Prior to joining AFME, Adam was Executive Director of the European Banking Authority (EBA).