After the UK’s vote to leave the European Union, the Capital Markets Union project looked wobbly. Originally conceived as the centrepiece of the Juncker Commission’s financial services agenda, suddenly the prospect of Europe’s largest capital market leaving the Union grabbed everyone’s attention.
Whether London-based firms could offer services to Europe’s corporates and investors seemed more important than, say, harmonising details of prospectuses across the Union. Equivalence, passporting, euro clearing and the location of the European Banking Authority were suddenly the most glamourous topics in town.
But now, CMU is coming up to its mid-term review — it’s due to be debated next week by the European Council, and there should be a mid-term review paper published June 7, if everything goes according to plan.
It’s still the same basic idea — stimulate cross-border capital markets activity across Europe, cut reliance on bank lending, boost access to capital for smaller firms — but it’s had a contemporary face-lift.
“The departure of the UK from the Single Market reinforces the need and urgency of further developing and integrating EU capital markets,” says a paper from the Commission. “The CMU reform programme must be updated so that it can meet the challenge of creating a more autonomous capital market for the EU-27 economy.”
Now non-performing loans are also a bigger part of the new plan, with the Commission outlining ways to strength secured creditors and allow them to enforce on collateral more easily. This will be massively politically controversial, if it works — what it will mean in practice is the likes of Cerberus, Lone Star and Fortress foreclosing on mom & pop stores in deprived areas of Italy and Portugal. That will help Europe make inroads on its NPL problem, but surely sets up trouble for the future.
Securitization, though, is still the most tangible project from the CMU file, and Tuesday is expected to bring some progress on the “simple, transparent and standardised” standard. It’s been mired in the trilogue discussions, with a newly assertive European Parliament squaring up to lobbyists and the Commission itself over specifying the new standard.
But a breakthrough compromise is widely expected on Tuesday, just ahead of the annual ABS market jamboree in Barcelona next week, with agreement on 5% risk retention, and a compromise on the hierarchy of capital treatments for securiitzations which may distinguish between the treatment applied to senior, and that applied to junior and mezzanine.
GlobalCapital’s Brussels correspondent Jean Comté has done a deep dive on which countries are holding it up, and why — read it if you care about the securitization market.
CMU now also includes material on strengthening the European Securities and Markets Authority (long opposed by the UK), and moving ahead even more vigorously to deal with the UK’s determination to abandon its role as the capital market for the continent.
According to the paper “there is a need to strengthen ESMA’s ability to identify and tackle weaknesses in national supervision. ESMA’s supervisory tools should be optimised to ensure that deficiencies identified in national supervisory outcome and practices are dealt with in a consistent and coherent manner."
The UK would be certain to block a strengthened ESMA able to override the Financial Conduct Authority, but it’s voluntarily abandoned its influence in this area. Meanwhile, a strengthened ESMA gives the EU another bargaining chip in the broader Brexit negotiations, particularly over euro clearing.
Steven Maijoor, chair of ESMA, has argued that financial stability requires euro clearing activities to be directly supervised from within the eurozone, and if the EU27 can argue that it has fully subsumed all of its national securities regulators into the ESMA framework, the UK’s case for special treatment gets weaker still.
In other British acts of pointless self-harm, GlobalCapital has been looking ahead to the UK’s ring-fencing regime — and particularly how it will affect services to corporates. There’s a large administrative burden, meaning things like re-plumbing all the sort codes for every corporate subsidiary, financing vehicle and so on to make sure they refer to the correct side of the ring-fence, but there are also serious competitive implications.
Ring-fencing comes in January 2019, so while banks have outlined their planned legal structures, they haven’t started segregating assets, or offered details on how they will capitalise their new entities. Nonetheless, nearly everyone assumes the bank outside the ring-fence will be weaker than the one inside the ring-fence. That’s pretty much the point of the regulation — protect retail with a bombproof bank, let the risky stuff happen outside.
For corporates wanting hedging, that creates trouble. They can go to a ring-fenced institution for simple FX and interest rate hedges, but anything more complicated has to be outside the ring-fence. That, in turn, incentivises them to demand (and sign up to) CSAs, so they can ignore the worsened credit quality of their counterparties.
But CSAs mean collateral and that means boosting access to liquidity. Just as likely, especially for eurozone corporates with only a couple of UK firms in their banking group, is that they just stop going to UK counterparties for their hedging needs, meaning a smaller market share for British institutions, and a tougher time for them to make a return from their corporate relationships.