EU sets out plans to free finance for investment

LONDON Thu Mar 27, 2014 6:35am EDT

LONDON (Reuters) - The European Union will look for ways other than the region's banks to finance infrastructure projects and invest in start-up companies, according to plans the EU published on Thursday.

The EU plans call for expanding stock and bond markets and tapping pension pots to help provide the trillion euros needed for new telecom, transport and energy networks by 2020.

Such projects could boost growth and help to create jobs. Elections for the European Parliament will be held in May, and youth unemployment is likely to be a top issue.

"We have been ambitious in our financial regulatory agenda, with positive results for financial stability and confidence," EU financial services chief Michel Barnier said in a statement. "As the economic recovery is picking up, we must be equally ambitious in our support for growth."

As reported by Reuters last month, the EU plans a series of reforms that include reworking some of the regulations Barnier introduced. Their unintended consequence has been to make it costly for banks and insurers to participate in long-term financing.

Some EU laws will be changed to ease curbs on what pension funds, which total 2.5 trillion euros in the EU, can invest in. The plan will also try to nurture new forms of finance, such as crowdfunding or online peer-to-peer lending.

The EU plans will start to rehabilitate securitization, the process of bundling loans into a bond. Investors have become wary of securities after bonds based on subprime U.S. mortgages led to a meltdown of global financial markets in 2008.

Bankers say securitization is one of the few businesses that can plug the gap left by banks' reluctance to lend and help to wean them off central bank money.

Parts of the plans will take years to implement. They mark a fundamental change in attitudes towards markets - politicians and small firms in countries such as Germany, for example, have historically been close to their regional banks.

"We have to focus on what's going to make a difference, and in my view that's securitization, which includes easing capital requirements on insurers who want to invest in securitization," said Simon Hills, the executive director of prudential capital at the British Bankers Association.

"Easing Europe's heavy reliance on funding by banks has to be done reasonably urgently," Hills said. "Otherwise, when the next downturn comes, we will have the same problems with banks deleveraging."

Deleveraging refers to how banks have cut back on lending and eliminated as many loans as they can since the financial crisis. Getting loans off their books reduces their risk and hence the amount of capital they must hold.

The EU is focusing on infrastructure to improve productivity, and on small companies, who account for two-thirds of jobs.

(Reporting by Huw Jones; Editing by Larry King)

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