Front Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 3 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Front Matter Page

IMF STAFF DISCUSSION NOTE

Contents

  • EXECUTIVE SUMMARY

  • INTRODUCTION

  • THE EUROPEAN LANDSCAPE

  • A. Size and Home Bias

  • B. Institutional Structure

  • C. The Brexit Challenge

  • COSTS OF MARKET FRAGMENTATION

  • A. Uneven Corporate Funding Costs

  • B. Restraints on Innovation and Growth

  • C. Forgone Macroeconomic Smoothing

  • BARRIERS TO CAPITAL MARKET INTEGRATION

  • A. Survey of Regulators and Market Participants

  • B. Quantified Gains from Specific Actions

  • POLICY ISSUES AND THE EU ACTION PLAN

  • A. Regulatory and Insolvency Principles

  • B. Specific EU Arrangements

  • C. The CMU Action Plan

  • FURTHER STEPS TO INTEGRATION

  • A. Enhancing Transparency

  • B. Sharpening Regulation and Supervision

  • C. Improving Insolvency Procedures

  • CONCLUSION

  • REFERENCES

Executive Summary

This note weighs the merits of a capital market union (CMU) for Europe, identifies major obstacles in its path, and recommends a set of carefully targeted policy actions.

European capital markets are relatively small, resulting in strong bank-dependence, and are split sharply along national lines. About 40 percent of EU households’ savings are held as bank deposits, compared with 10 percent in the United States; only 30 percent of EU nonfinancial firms’ liabilities are securities; and more than half of EU long-term investors’ assets are domestic claims.

This results in an uneven playing field in terms of corporate funding costs, in credit rationing for collateral-constrained firms, and limited shock absorption. Firms in some euro area countries pay up to 250 basis points more on debt than their peers in other euro area countries. Certain types of firms—notably start-ups with few assets to post as collateral—may be denied financing. And consumption is four times more sensitive to local shocks in the EU than in the 50 US states.

The benefits of integration center on expanding financial choice, ultimately to support capital formation and resilience. More arm’s-length cross-border finance using tradable instruments would allow firms to tap into a broader investor base, evening out funding costs across the region and improving access to venture capital. At the same time, enhancing savers’ ability to diversify their portfolios makes domestic demand less sensitive to local economic outcomes.

Capital market development and integration would support a healthy diversity in European finance. On the one hand, the increased interconnection that comes with capital market integration can channel contagion. On the other, the shock-absorbing properties of equity claims are well recognized. In any event, capital markets would complement, not replace, banking.

Proceeding methodically, this note identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. A new survey of practitioners highlights informational issues in securities markets and in withholding tax relief or refund procedures. New empirical work finds that the volume of cross-border claims is significantly held back by uneven regulatory quality and deficient insolvency regimes in some countries—and the latter also explains much of the cross-country dispersion in firms’ debt financing costs.

Based on these findings, the note urges three policy priorities, focused on the three barriers. Transparency can be enhanced by requiring centralized, standardized, and ongoing reporting by all issuers; addressing challenges to the affordability of research on small issuers and unlisted firms; and streamlining cross-border withholding tax procedures. Regulation can be sharpened by centralizing oversight of systemic intermediaries; strengthening supervisory convergence tools to buttress investor protection where it falls short; taking further steps to support a cost-efficient, tax-effective, portable pension product; and pursuing close regulatory cooperation with non-EU countries. Insolvency processes can benefit from a “name and shame” approach involving the setting of minimum standards and systematic monitoring of countries’ progress in observing them.

There is no roadblock—such steps should prove feasible without a new grand bargain.

A Capital Market Union for Europe
Author: Mr. Ashok Vir Bhatia, Ms. Srobona Mitra, Mr. Shekhar Aiyar, Luiza Antoun de Almeida, Cristina Cuervo, Mr. Andre O Santos, and Tryggvi Gudmundsson