A senior German banker has warned that the EU’s efforts to build a capital markets union should not be seen as a way of reducing the role of bank lending in funding the region’s companies.
The new president of the European Commission, Jean-Claude Juncker, has made a capital markets union one of his priorities, in an effort to inject new life into the region’s sluggish economy.
In contrast to their US peers, which get the majority of their financing from the securities markets, European companies traditionally receive about 80 per cent of their external funding from bank loans.
This can leave small companies, in particular, struggling to access funding when banks retrench, as they did in the years following the financial crisis — prompting calls for greater efforts to foster non-bank forms of funding.
However, Georg Fahrenschon, head of the German Savings Banks Association, said that although a capital markets union made sense, the project should not come “at the cost of traditional bank financing”.
“In many cases, traditional bank financing is ideal: well practised, and based on the fact that local banks know their customers over years, can judge them well, and can serve them very well,” he said in an interview with the Financial Times.
The EU is considering a range of measures to spur capital markets in the bloc and break down barriers to cross-border investment. The European Commission, the EU’s executive arm, is set to propose regulatory changes as soon as next month, aimed at reviving the market for asset-backed debt and promoting infrastructure investment.
The commission has also suggested longer term measures to address differences in national insolvency laws, and has sought views on greater standardisation of the corporate debt market. However, Mr Fahrenschon warned that for many small companies, corporate bonds were simply not appropriate.
“The vast majority of capital market instruments are too expensive for the important Mittelstand players,” he said, referring to the small and medium-sized companies that make up the backbone of the German economy.
“Corporate bonds with a volume of less than €10m are simply not worth doing, and institutional investors who are key to this market are only interested in bonds with a volume of more than €25m.
“The fit doesn’t work. And that is why we need two things. Besides a capital markets union, we also need a platform for traditional, regionally oriented suppliers of credit.”
The EU Commission has said that it was aware of the specific challenges smaller companies face in tapping markets. A discussion paper published in February backed moves by financial companies to promote cross-border private placements of securities, saying this would “encourage direct investment into smaller businesses’’.
Mr Fahrenschon, who previously served as finance minister for the German state of Bavaria, also called for a review of the impact of the wave of regulation that followed the financial crisis, arguing that its full impact was not properly understood.
“It was a real tsunami that landed on the banking sector,” he said. “In some cases there are rules that contradict each other. I don’t think there is a single expert in the whole world who can judge all the rules in their interdependence.”
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