A capital markets union could be next in EU in-tray

Thu Jul 3, 2014 7:32am EDT

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* Banks look if markets union becomes more than catchphrase

* Political support to boost market based funding of economy

* European Commission, European Central Bank key players

* Hints that role of ESMA markets watchdog will be enhanced

* For INSIGHT story on potential EU reforms, click

By Huw Jones

LONDON, July 3 (Reuters) - The European Union may seek to tighten its grip over markets to help find funds for economic growth - a move that could stoke anti-EU sentiment in Britain, the EU's largest financial centre.

Bankers and policymakers say that while the idea of a capital markets union is embryonic, it is seen as a logical step after the euro zone completes its milestone banking union.

From November the European Central Bank will be the single supervisor for top lenders, raising questions about how fragmentation in equity and bond markets could also be reduced.

The new European Commission, the EU's executive, starts work under Jean-Claude Juncker in the same month, with talk in Brussels that a capital markets union may also form a key strand of broad reforms aimed at generating growth and jobs.

The commission declined to comment and has made no statements on the topic. German bankers have said a top official mentioned it privately to them, however, saying that unlike the banking union, capital markets union refers to all 28 EU states.

"It's taking the single market to the next step," a European banker in Brussels said.

So far, the term is little more than a catchy title for complex efforts to secure more financing from markets for companies and infrastructure projects that will fuel growth, said Graham Bishop, who advises the EU on financial services.

The commission said in March it would look at ways to improve liquidity in corporate bond markets, boost private placements and securitisations and encourage more companies to list. It also wants to make crowdfunding easier.

The securities industry is waiting to see whether the proposals will include a move to centralise supervision.

"This is still a twinkle but it needs to be watched," said Sharon Bowles, who has just stepped down as chairman of the European Parliament's economic affairs committee, which oversaw a welter of new financial rules over the past five years.

"To work it will need to be enabling not disabling, taking down barriers not erecting them, but whether those in the European Commission see it that way or as a bonanza for more regulation, I don't know."

TRANSATLANTIC ENVY

EU policymakers look enviously across the Atlantic, where up to 70 percent of funding for the U.S. economy is from markets, with the rest from banks - almost the exact opposite to Europe.

Less reliance on banks helped the U.S. economy bounce back faster from the 2007-09 financial crisis, while banks in Europe have cut lending to focus on building up capital buffers.

An official at a leading EU institution said Europe may not want to fully emulate the United States but find a "middle way" with a more equal balance between banks and markets for funding.

The ECB is also a key player in the markets union debate as it tries to revive securitisation, or the bundling of loans into bonds to raise cash for companies to invest.

The central bank said in a report in April that becoming the euro zone's main banking supervisor represents a significant move towards common supervision in markets as well, a statement that raised regulatory eyebrows in Britain.

The ECB said in the report that most banks are key players in markets - also seen by British regulators as the euro zone's central bank justifying a move onto securities turf over time.

Yves Mersch, member of the ECB's core board, went further and last month floated the idea of widening the banking union by speaking of the benefits of a "genuine financial market union".

An ECB spokesman said the central bank supports policies that reduce fragmentation of financial markets and give firms a broader choice of financing.

Nicolas Veron, an analyst at Brussels think-tank Bruegel, said there was also top-level political backing to deepen the bloc's capital markets after a bruising banking crisis.

EU leaders spoke last week of a framework to aid long-term investment in the economy, seen by officials as a coded reference to boosting market-based financing.

"It's not just about centralising policies, but about identifying bottlenecks," Veron said.

A draft European Commission report seen by Reuters last week suggested the European Securities and Markets Authority (ESMA) could be asked to supervise market infrastructure and "shadow banking", which includes securitisation. The EU's markets watchdog has already been given powers to ban harmful products and stop short-selling of shares.

"Some regulators now believe there could be a push to make it a European conduct regulator over time," a UK banker said.

CITY WARY

Britain challenged ESMA's power to ban short-selling in the EU's top court but lost, in a ruling lawyers say will make it easier for Brussels to give the watchdog even more power over countries. A stronger ESMA could rival London's Financial Conduct Authority, which supervises the bloc's biggest markets.

Britain's finance ministry had no immediate comment on the possibility of a capital markets union. Although London's financial clout could help it shape such a framework, any suggestion the City is losing its independence might boost Euroscepticism ahead of national elections in 2015.

Critics of Prime Minister David Cameron meanwhile say his failed bid to block new commission president Juncker could reduce Britain's influence over a markets union.

After banking union, bankers in Britain fear euro zone states will form a "caucus" to swing votes on EU market rules. The British Bankers' Association said changes may be needed, such as in voting, to preserve the single financial market for all 28 EU states.

Some analysts argue that a union would benefit London's financial district. "This is a dramatic opportunity for the City of London," Bishop said. (Editing by Catherine Evans)

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