February23,20155:20pm

AbigbangtoexpandEuropeseconomy
MichaelSherwoodandRichardGnodde

Acapitalmarketsunionisneeded,writesMichaelSherwoodand
RichardGnodde

hefortificationofthebankshasbeenthesignal
accomplishmentofEuropeaneconomicpolicy
inthepastfiveyears.Yettheeconomicrecovery
remainsweakandpolicymakersarelookingfor
newwaystounlockthecontinentspotential.
Onelessontheyhavelearntisthatstrongerbanks
arenotenough.Europeneedsamarketbased
financialsystemthatallocatescapitalefficientlytohouseholdsandbusinessesfromLisbon
toLjubljanaandthatmeansitneedsnotjustabankingunion,butacapitalmarkets
union,too.
EPA

Capitalmarketscancomplementthebankingsectorby
offeringcompaniesadditionalwaysoffinancingthemselves,andprovidinghouseholdswith
newwaysofinvestingtheirsavings.YetEuropesfinancialsystemhastraditionallycentred
onbanks,whichprovideabout70percentofEuropeanfirmsexternalfinancing,withthe
remaindercomingdirectlyfromsecuritiesmarkets.
IntheUS,thesesharesarereversed.Bankdependenceisbothacauseandaconsequenceof
thestructureoftheEuropeancorporatesector,whichisdominatedbysmallandmedium
sizedenterprisesthatcannotaccesscapitalmarketsdirectly.
Thefinancialcrisishasrevealedweaknessesinthisbankdependentmodel.Larger
companieswithdirectaccesstocapitalmarketshaveperformedbetterthansmaller
companies,whichhavepreferredtorelyonbanksandavoidthecostlyandonerousprocess
ofissuingsecuritiesinthefinancialmarkets.Thismakesthemvulnerabletoadroughtof
creditwhenbanksfindthemselvesintrouble,astheydidsevenyearsago.
Theinternationalregulatoryresponsetothefinancialcrisis,whichisintendedtomakesure
thatbanksarebettercapitalisedandtheirlendingoperationsmorecautious,couldinsome
waysmakethepredicamentofsmallbusinessworse.Robustbankswillstrengthenthe
financialsectorasawhole.Butbankcreditislikelytobecomelessfreelyavailableandmore
costlytothedetrimentofthosecompaniesandeconomiesthataremoredependentupon
it.

Thesolutionisthreefold:improvethefunctioningofthebankingsystemitselfdevelop
alternativesourcesofmarketfundingtoallowborrowersaccesstogreaterdiversityof
financinganddevelopsecuritisationmarketsthatallowhouseholdsandcompaniesbetter
accesstocapitalviabanks.
Noneofthisisasubstituteforthecontinuingworkofstrengtheningbankbalancesheetsor
centralisingsupervisoryresponsibilitiesattheEuropeanCentralBank.
This,togetherwithrulesthatgivebanksmoreflexibilitytoshiftcapitalbetweenoperations
indifferenteurozonecountries,promisetomakethebankingmarketmoreefficientand
betteratallocatingcapital.
However,alternativestotraditionalbankfinancingmustalsobecomeabiggerpartof
Europesfuture,particularlyforsmallcompaniesthatneedeasieraccesstofundsthatallow
themtogrowandprosper.
Venturecapitalandprivateequityfirmswhichhelpentrepreneursfundnewprojectsand
technologiesofferanalternativetobanks.
Developingmarketsforassetbackedsecuritiescanalsoimprovethesupply
ofbankcredittohouseholdsandfirmsbyallowingbanksmorediversifiedfundingsources.
Notonlywouldsecuritisationimprovetheavailabilityofmortgageandconsumerfinance,it
wouldalsotakeloanstohouseholdsoffthebalancesheetsofbanks,enablingthemtoextend
credittobusinessesinstead.Creatingmarketsforassetbackedsecuritiesisanimportant
steptoeasingfinancingconstraints.Nolesspressingistheneedtomakesuretheyare
transparentandsimple.Therecanbenoreturntothecomplexandopaqueinstrumentsthat
playedalargeroleinthecrisis.
Largechallengeslieahead.Entrenchedideasandwaysofdoingbusinesscanbedifficultto
supplant.Eachlinkinthecapitalmarketschainneedstoberobust,andthisrequirescareful
collaborationamongallactors.
Theauthoritiesshouldsetacredibledeadlineforimplementingcapitalmarketsunion.
IdentifyingthedateoftheEUscapitalmarketsBigBangwillgalvaniseprivatesector
actionjustasitdidintheUKthreedecadesago.
Througheffortssuchasthese,thefinancialsectorcanhelpsupportgrowthandjobcreation,
andenableEuropetofulfilitseconomicpotential.
ThewritersarecochiefexecutivesofGoldmanSachsInternational
RELATEDTOPICS

European banks, European Central Bank

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