* 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 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."
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.
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)