Why Funding SMEs Within the EU Capital Markets Union Action Plan Is Challenging

The EU faces challenges in providing a unified capital market for investors and issuers as well as overriding fragmented national markets within an appropriate regulatory context. I discuss these challenges in a recent video interview (in Spanish) with the online finance and investment forum Estrategias y Inversion.

Key points I make in the interview include:

1. The problem in the EU is finding a way for small and medium-sized enterprises (SMEs) — which make up 99 out of every 100 businesses in Europe and employ two out of every three employees there — to get the financing they need. If banks cannot lend, then what are the alternatives? Market-based financing (also called “shadow banking”) is showing potential, and banks are catching up by aligning themselves with online marketplace lending platforms.
2. The EU has gone from a policy environment of strong regulatory pressure — which resulted in the previous European Commission passing about 40 pieces of legislation — to an environment focused on seeing how all the legislation affects the functioning of the capital markets, responding to the possible regulatory impediments that have arisen, and watching the legislation’s effect on growth and innovation.
3. European banks are caught in a conundrum because they still have to clear up their bad loan portfolios, which their US counterparts have largely dealt with. This situation, together with stricter capital requirements, and a challenging policy environment with low or negative interest rates, has led to a double whammy affecting both banks and SMEs. Additionally, credit information is still very fragmented in the EU, as shown by our CFA Institute member survey on the Capital Markets Union from May 2015.

We will continue to follow and comment on the EU CMU Action Plan as it evolves. The European Commission aims to have the main building blocks of the CMU in place in 2019.

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Image Credit: ©iStockphoto.com/FrankyDeMeyer