CAPITAL MARKETS FOR GROWTH
     

Capital markets are markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities.

Europe wants to boost the growth potential and strengthen its financial stability. Here, a Capital Markets Union is a welcome initiative, where key components of cross-border capital market transactions are price discovery, execution and enforcement.


Navigating the storm:
Setting long-term goals in volatile market conditions?
2015 ECMI Annual Conference ∙ October 20nd ∙ National Bank of Belgium, Brussels



Light and shadows in Europe’s new Action Plan for Capital Markets Union
Tuesday, 6 October 2015, Diego Valiante CEPS

The European Commission’s new Action Plan for Capital Markets Union, unveiled on September 30th, consists in a nutshell of a short list of technical proposals and a longer one of (rather general) potential actions. Overall, the plan indeed proposes to achieve some short-term objectives, such as a reduction of listing costs for SMEs, but it lacks long-term vision. The plan bundles actions under rather generic objectives of long-term finance or cross-border investing. Improving the informational infrastructure (e.g. accounting standards, company data) and cross-border enforcement of rules is left to vaguely defined future actions, but these constitute the core of the capital markets infrastructure. Without a well-defined set of measurable objectives, the whole plan may lose political momentum and become an opportunity for interested parties to cherry pick their pet provisions. Building a single market, i.e. removing cross-border obstacles to capital circulation, is too challenging a task to simply appear as one of many items on a long list of general objectives, which incidentally do not include institutional reform. The ultimate risk is that the Commission may just miss a unique opportunity to revamp and improve the financial integration process in Europe after almost a decade of harmful retrenchment. Read the pubication

How can EU institutions set long-term goals with highly volatile market conditions? The action plan for the creation of a capital markets union has drown attention to a renewed regulatory and institutional design to support greater financial and economic integration. This year's conference discussed how EU institutions can set long-term goals in the presence of highly volatile market conditions. Jointly organised with the Brevan Howard Centre for Financial Analysis, Imperial College London, the conference consisted of four sessions with keynote speeches and presentations, followed by panel debates.

Sessions:
- Law and Finance: Europe’s Capital Markets Union: What is the ‘long-term’ view?
- Macroeconomic and institutional Outlook: Quantitative easing, asset prices and economic growth
- Market Structure: The rise of asset management and capital market-based financing: A cyclical or a structural shift?
- Crisis management: Unravelling Penelope’s web: Crisis management and resolution of financial market infrastructure.

Conference report:

Presentations:
- Lord Jonathan Hill,
European Commissioner for Financial Stability, Financial Services and Capital Markets Union (Session 1)
- Paul G. Mahoney
, David and Mary Harrison Distinguished Professor of Law, Arnold H. Leon Professor of Law, Dean, University of Virginia School of Law (Session 1)
- Florencio Lopez de Silanes,
Professor of Finance and Law, EDHEC Business School (Session 1)
- Marianne Nessén,
Head of Monetary Policy Department, Sveriges Riksbank (Session 2)
- José-Luis Peydró,
ICREA Professor of Economics, Universitat Pompeu Fabra and Barcelona GSE (Session 2)
- Olivier De Bandt,
Director of Research at the Prudential Supervision Authority, Banque de France (Session 2)
- Perry Mehrling,
Professor of Economics, Barnard College, Columbia University (Session 3)
- Albert Menkveld,
Professor in Financial Economics, VU University Amsterdam (Session 4)
- Sheri Markose
Professor of Economics, Essex University (Session 4)

ECMI organized its annual conferene 2014 on the subject: 'The Five Years Ahead - A new action plan for Europe’s financial markets?' Options for European capital markets were discussed to revert financial disintegration and to relaunch a new plan of reforms for European capital markets. The conference also assessed the impact of financial reforms on European financial markets integration, taking stock of evidence discussed by panels of international experts. The conference consisted of four sessions with keynote speeches and presentations (e.g 'Regulating under Uncertainty: The Impact of Financial Reforms on Liquidity by Mathias Dewatripont), followed by panel debates with audience involvement. The structure of the conference ensured that attention was given to macroeconomic and institutional outlook, law and finance, market microstructure and access to finance.

This year’s event focused on important challenges facing Europe's financial markets. Financial fragmentation remains a drag on some national economies and one session questioned whether the creation of the Banking Union can reverse the trend without a fiscal backstop to the resolution mechanism. A second session discussed how the law can shape liquidity in the financial system before a financial crisis, with its implementation, and afterwards, with its relaxation.

Nevertheless, there was broad agreement that more robust action to increase capital provisions for banks and to pursue similar actions in shadow banking activities are needed. The third session discussed the microstructure of financial markets and how high-frequency trading is reaching the end of its run given the risks it poses to market functioning. The panel discussed whether we are approaching the end of continuous trading. The last session offered an overview of the challenges that crowdfunding faces as a more important source of funding for advanced economies.

Click for the presentation Commissioner Rehn

Capital markets is divided into the primary market, where emissions occur and the secondary market, where existing property titles are traded, both with a maturity from approximately 2 years. Mostly it concerns securities (stocks and bonds).

ECMI addressed on 18 October 2012 during their Annual Conference the outlook for the euro area, the role of capital markets after bank deleveraging, market structure reforms and investor protection, which conference was titled 'Rebalancing Europe, rebuilding the EMU'. Far from abating, the crisis in the euro area continues to unfold. A threat to European integration and global growth, the internal imbalances of the EU require a comprehensive policy response. Austerity and structural reforms in creditor countries are necessary but not sufficient. The European Council has adopted significant commitments but its implementation remains uncertain. Which roadmap to follow to exit the crisis? How many capital markets and in particular 'eurobonds' to contribute to revive the euro area?

The process of rebalancing will inevitably take time, and the rebalancing needs are considerable. But what matters is that this process has already been going on for some time. And what matters even more is that the EU MS and EU institutions will maintain the momentum of reform and stabilisation through decisive policy action. Competitiveness that was lost during the first decade of EMU is being regained, as the re-convergence of unit labour costs clearly shows. In the euro area in 2011, the largest declines in relative unit labour costs were seen in Ireland, Greece and Spain".

Commissioner Olli Rehn from Economic and Monetary Affairs, spoke at the ECMI Annual Conference and gave his take of the economic rebalancing that is going on in Europe and of our policy response to the debt crisis through a presentation (corresponding comments on the slides). All to return to recovery and growth, some key elements were brought at issue: capital markets are not banking markets, some slow and subdued recovery in real GDP is in progress, unemployment remains high, public deficit continue to narrow, debt reduction comes first, intra euro area rebalancing (current account developments) takes time but is going on for some time.

During the panel discussion came up that disintegration has to be prevented, if goals are not achieved there is more austerity needed, there are no similar policies between member states (e.g. what is meant by fiscal consolidation?), we have to look at the mechanisms to realize a monetary union and that we need a banking union, a fiscal union and deeper integration of decision making.

Paul de Grauwe, London School of Economics, learns us about towards more symmetry of macroeconomic policies in the Eurozone. Markets have pushed some countries in bad equilibria and others in good equilibria. Authorities should not accept this market outcome, which is the result of fear and panic. Internal devaluations in PIIGS countries since 2008-09 amounts between 0,6 and 21,1. The contribution of the core countries in the adjustment amounts zero. Stimulus in the North, where spending is below production (current account surplus) and austerity in the South (but spread out over more years). This also allows to deal with current account imbalances.

The debtor countries have not been able to stabilize their government debt ratios (in fact these are still on an explosive path). The situation of the creditor countries is dramatically different. Creditor countries have managed to stabilize these ratios. This opens a window of opportunity to introduce a rule that can contribute to more symmetry in the macroeconomic policies in the Eurozone. Finally, Julian Callow, chief international economist from Barclays, made comments on unemployment, investment, market confidence, and import and export.

Since 2008, bank deleveraging is reshaping the financial system globally. The process has been to some extent slowed down in Europe by monetary policy interventions and the fears of a strong credit crunch for those economies where capital markets are not sufficiently developed. Non-bank finance is opening new windows of opportunity but challenges remain in understanding its functioning and ensuring its resilience.

Manmohan Singh, Senior Economist, International Monetary Fund, showed importance of looking at the (other) deleveraging. De-leveraging of the financial system due to the shortening of‘re-pledging chains’ as a proxy for interconnectedness of the financial system has not (yet) received attention; this deleveraging is not being postponed by the markets despite the recent official sector support.
Pledged Collateral for re-use does not appear on B/S but only footnotes. Singh also pointed to consequences of QE, monetary policy issues and cost of credit.

Philipp Hartmann (ECB), Margaret Doyle (Deloitte) and Stephen Dulake (JP Morgan) gave insights during panel presentations.  

Ongoing reforms at EU level to strengthen market infrastructure have increased uncertainty about the overall effects. New legislation tries to combine financial stability with long-term objectives to open-up market infrastructure along the whole value chain.
The panel session examined how these two objectives will interact in practice and the likely effects of recent and upcoming legislation on financial stability, competition and market efficiency.

European Securities and Market Authority (ESMA) pointed by means of a presentation 5 topics concerning capital markets structure reform: Comm. Derivatives, Pre- and Post-trade transparency, Data (consolidation, publication, reporting), Microstructure (tick sizes, fees, circuit breakers) and Trading obligation. Investor protection is a competence shared between national and EU legislators but intense rule-making at national level could reverse the single market by inducing national market segmentation. MIFID I introduced an EU-wide regime for investor protection but national nuances have prevented harmonisation.

Business conduct rules, marketing rules and fiducairy are currently the object of intense negotation in view of forthcoming legislation. Are the rules envisaged sufficient? What more should be done? (Recommended is ECMI's 2010 report of the European investors working group 'Restoring Investor Confidence in European Capital Markets'.

Understanding the products and the risks was one of the conclusions. In this context, financial education matters. Discussed was also liquidity and volatility in the market. We must have regulation and inforcement powers. It comes to fairness of financial institutions.

presentation Paul de Grauwepresentation Paul de Grauwe

Capital markets and bank deleveraging

Key takeaways from each session  (excerpt from the report):
  • Despite the significant fiscal multipliers, the magnitude of the imbalances accumulated in the euro area over the past decade and its vulnerability to adverse market reactions should prevent any deviation from the agreed path to fiscal sustainability. There should be room however for member states with stable levels of debt to run small deficits, so as to ease adjustment and facilitate convergence. 

  • Even though bank balance sheets remain stable (moderate bank deleveraging), the use of collateral has radically decreased since 2008 (significant deleveraging in capital markets). Lower use of collateral means less lubrication of markets and lower interconnection among financial institutions, which policy-makers have tried to mitigate through quantitative easing possibly at a higher cost. The overall implications of this process are not yet well understood.

  • The structure of European capital markets is undergoing profound changes due to comprehensive regulatory reform and innovation in markets. This process needs to balance the costs for investors of building up a more stable architecture with the need to realise a pan-European infrastructure to reap the benefits of the single market.

  • Investor protection merits more attention as the driving force of a (not yet fully realised) single market for retail investment products. Regulatory fragmentation at national level is a threat to the single market project. Regulatory and supervisory reform should be more ambitious and broader in scope. Increased transparency should be complemented with measures addressing directly the incentives of intermediaries. Continue reading on the website

touch for the full report of the conference, complete with a summary of each session and keynote presentation.