WHO’S GOING TO BE holding their breath for the pan-European capital markets action plan due next summer from the office of Jonathan Hill, the freshly-installed European Commissioner for Financial Stability, Financial Services and Capital Markets Union? Alas, not me.
He said his action plan will be his roadmap to developing an ambitious capital markets union. Before he gets there, there’ll be yet another public consultation. But then I fear we’ll be underwhelmed by his blueprint to get European SMEs financed. I know that sounds a bit cynical given he’s only been in office for a matter of days, but on the basis of what he’s said, his plan won’t diverge too much from previous attempts.
How many reviews, analyses, surveys, consultations or white papers does it take for policymakers to figure out that there’s a problem with getting Europe’s smaller companies funded? It’s partly of their own making, partly down to the fragile economic environment, partly down to the corporate structure in many parts of Europe, and partly due to the lack of an integrated system of grants, working capital loans, expansion capital and co-financing facilities from EU governments.
ON THE FIRST issue, regulators have not only forced banks to hold gargantuan amounts of capital but also forced a shift to lower-risk business models through punitive controls – and imposed billions of euros in extra costs related to legal and business structures. That’s cash that could be put to productive use. The policymakers who decry the lack of bank financing into the real economy are the very same people pushing for eye-wateringly high capital levels and other sector handcuffs in the name of systemic risk prevention.
The latter end-game may well be a laudable one, but have policymakers figured out yet that there’s an unbreakable link between credit extension on one hand and capital quantum, RWA reduction and other forms of deleveraging, leverage caps, liquidity buffers and huge operational costs on the other? The state of the regional economy and two of its natural outcomes – poor credit demand, and cash hoarding (leading to positive net cash and low net debt-to-EBITDA positions in many cases) – may be cyclical phenomena, but they are similarly having a material impact and playing directly into this story.
Let’s also be clear what we’re talking about: the issue lies not with publicly-quoted mid-caps – these have a multitude of cost-effective funding options. The problem lies with small- and micro-caps. My issue is that none of the new funding modalities considered to this point or to be considered in future evaluations will get us away from the basic reality that banks can only ever really be the financing channel of choice for the majority of small companies. Mini-bonds are a nice idea, but they won’t catch on.
The policymakers who decry the lack of bank financing are the very same people pushing for eye-wateringly high capital levels
POLICYMAKERS SEEM TO have bought the capital marketisation thesis and have concluded that banks are unlikely to be the main engine of SME financing. I disagree. I’m convinced the reality will be far more nuanced in terms of Europe’s future financing stratification.
One of Hill’s starting points is the securitisation market. Just as I said last week that I’m done with the ‘seminal vs. cyclical’ debate, I’ve now become frustrated with the policy obsession with safe securitisation as a fulcrum to get us to SME financing nirvana. Used in the right way securitisation is a truly elegant tool. But in the SME arena: It. Ain’t. Going. To. Change. Anything.
Hill is also going to conduct a comparison of private placement markets and look at the treatment of covered bonds. PPs are another great tool showing a lot of promise. But what is there to compare? This has been done to death. USPP and Schuldschein are already open to European companies; Euro-PP is evolving slowly; GPPs are being used by German insurance companies as a half-way house between direct financing and a disintermediated form of front-line origination. ICMA has convened a PP committee and is on the case.
Oddly, Hill likes the notion of retail investing in growth equity and start-ups. “If a new business owner in the EU has an opportunity to expand, at the moment his options are mainly to turn to friends and family or his local bank. I want to expand his range of options to include listing on a growth market, which could give him access to investors anywhere within the EU, to business angels, or crowdfunding. That would be good for business, but also good for savers as they have more investment choices,” he said.
I say oddly because crowd-funding – another over-analysed phenomenon – will never and arguably should never become a form of flow corporate financing. That’s not what it’s for. What’s also weird is that on the one hand, we have the UK regulator banning us from buying notionally risky bank hybrids to save us from ourselves, but on the other we have an EU Commissioner promoting seriously super-risky and highly speculative crowd-funding and growth equity as savings options for retail? An option to lose your shirt, maybe …
Hill’s going to be pushing the creation of European Long Term Investment Funds. He reckons they’ll mobilise funding for infrastructure and businesses, particularly SMEs. He may be right on the former but I’m sceptical on the latter.
Policymakers should stop serially over-analysing this situation and actually do something concrete, no matter how small, and build it out over time. As he said himself, this is not an overnight project. On which point: what’s the timeframe for Hill’s capital markets union? Five years.
In his dreams …
