UPDATE 1-A capital markets union could be next thing in EU's in-tray

Thu Jul 3, 2014 12:31pm EDT

Related Topics

* 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 (Adds UK finance ministry comment)

By Huw Jones

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

Bankers and policymakers say capital markets union is seen as a logical step after the euro zone completes 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.

Talk in Brussels suggests a capital markets union may also form a key strand of broad reforms aimed at generating growth and jobs to be undertaken by the new European Commission.

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 just a catchy title for multiple plans to secure more financing from markets for companies and infrastructure projects that would help drive growth, said Graham Bishop, who advises the EU on financial services.

The Commission is looking at ways to improve liquidity in corporate bond markets, boost private placements and securitisations and encourage company listings.

"This is still a twinkle but it needs to be watched," said Sharon Bowles, the former head of the European Parliament's influential economic affairs committee.

"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 an April report that becoming the euro zone's main banking supervisor was a significant move towards common supervision in markets, where banks are key players. That statement raised regulatory eyebrows in Britain.

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".

A spokesman said the ECB supports policies to give firms more choice of funding and reduce fragmentation in markets.

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.

"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.

"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. A stronger ESMA could rival London's Financial Conduct Authority, which supervises the bloc's biggest markets.

Britain's finance ministry declined to comment directly but said Britain has been clear that the next executive Commission must consider how to strengthen the European single market.

"This includes the proper and effective functioning of Europe's capital markets and their role in unlocking the EU's full growth potential," a spokesman said.

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 Jean-Claude Juncker could reduce Britain's influence over a markets 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 in voting may be needed 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 and Foo Yun Chee)

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