The European Commission has taken action in recent months to facilitate and encourage cross-border financing in small businesses. It’s a complicated feat that will require streamlining the regulations for SME lending in all member states, but officials have taken the first steps toward this goal with the plan to launch the Capital Markets Union – a single market to ease small business finance throughout the continent.
This week, EU policymakers made new strides in the development of the CMU and what it would mean for SME investment.
Reports published Thursday (July 9) said Members of the European Parliament passed a resolution (532-111, with 24 abstentions) that would make it easier to channel fiscal savings into small businesses and to protect investors who back small businesses across borders.
The non-binding resolution aims to create the building blocks for the CMU, including a broader range of investment choices, resources for investors to mitigate risk, and clear, public information to educate lenders on investment choices across the EU, according to FTSE Global Markets. MEPs are hoping to implement these ventures by 2018.
According to the text of the resolution, MEPs want the CMU to provide reliable, non-bank access to financing for the EU’s small- and medium-sized enterprises. Part of this effort would include information available across the European Union to both small business owners and investors about new investment opportunities.
Policymakers also stressed Thursday that any regulation applicable to small businesses looking to raise money must be SME-friendly through easily understandable rules and procedures, and with minimal administrative burden.
Reports said that the draft legislation also explores how small businesses may be able to benefit from standardized securitization so they can access new financial instruments. A wide range of financing options is crucial, the lawmakers said, considering the wide range of needs among small businesses.
Last, MEPs declared that legislation needs to be implemented in all member states to ensure that financing can flow freely across borders. While each member state has different needs and economies, lawmakers said that there should be some degree of standardization to implement the CMU rules across the union.
The Capital Markets Union proposal was first introduced last February. While it has mostly been received with support, the ability for CMU legislation to meet the needs and challenges of all member states has brought some criticism.
The EU’s vote on Thursday signaled the next step in addressing these concerns. While one of the CMU’s main objectives was to boost the availability of credit data and investment strategy information for both investors and small businesses, the language in the new resolution provides a more straightforward way to realize this goal.
Still, controversy continues, and lawmakers have a long way to go before they appease all sides invested in the development of the CMU.
According to a recent post on JDSupra Business Advisor by Orrick Structured Finance Group’s Alex Sobolev, there is still significant disagreement between the European Commission and traditional banks regarding the CMU.
When the Capital Markets Union was first proposed, lawmakers outlined five priorities for the initiative: lowering barriers to accessing capital markets, widening SMEs’ investor base, establishing sustainable securitization, developing EU private placement markets, and strengthening long-term investments.
Last month, bankers addressed these priorities at the Capital Market Forum annual conference, where the industry appeared to only agree with one of these goals: securitization. According to Sobolev, bankers agreed that establishing regulatory relief to make securitization easy and transparent would be most easily implemented and provide the greatest immediate benefits.
But bankers were defiant against the EC’s stance on other matters, most notably on the issue of harmonizing insolvency laws across EU member states, Sobolev said.
Last week, the head of the European Central Bank, Mario Draghi, highlighted other risks associated with the CMU initiative. In a speech delivered in Milan, Italy, Draghi said unintended consequences of a unified single financial market would require regulators to obtain greater power to combat those risks – powers that they do not presently have.
While there are multiple benefits to the CMU, including a lessened burden on small businesses in times of economic downturns and more options for accessing financing, the ECB President said that the varying degree of legislation across EU member states involving insolvency, taxation and corporate governance rules make the CMU a potential land mine of complex legal disputes.
To solve this, Draghi called for the establishment of a single CMU regulator.
“The further integration of Europe’s financial sectors may enhance systemic risk across the continent, meaning that ultimately, a single regulatory supervisor and macroprudential toolkit for capital markets should be established,” he stated, adding that while this is more of a long-term consideration, it will likely be necessary in the near future in order to ensure the CMU offers its full potential of benefits to the EU market.
While many of these concerns that must be addressed may be considered “long-term considerations,” MEPs are hoping to finalize the proposal for the CMU by 2019 – not far off into the future. While Thursday’s vote in favor of the resolution further clarifies exactly how the CMU would operate, opponents and analysts continue to voice concerns that make it clear the EU has a long way to go before the kinks of the Capital Markets Union are ironed out.
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