By Marc Jones
LONDON (Reuters) – The International Monetary Fund has proposed that the European Union improve transparency, regulatory oversight and insolvency rules in its proposals to create a capital market system to rival the United States, a senior IMF official said.
EU efforts to create a Capital Markets Union has made little headway so far, but is seen as offering major benefits, such as encouraging companies to raise more funds through stocks and bonds rather than relying so heavily on bank loans.
The CMU seeks to encourage companies to raise money by issuing stocks and bonds, rather than continuing to raise loans from EU banks, some of which are still struggling to recover from the 2008 financial crisis.
It was originally launched in 2015 and has been a central plank of the current European Commission’s mandate which is due to expire. But after a reset of the project in 2017 and adoption of 11 new EU laws, most companies in Europe still get their money from banks.
The IMF is set to publish an analysis in the next week or two on the potential benefits of a CMU and give recommendations on ways to improve it, according to Poul Thomsen, head of its European department.
Speaking at the London School of Economics on Friday, he said the improvements focused on three areas — transparency, regulatory consistency and insolvency frameworks.
On transparency, the EU has so proposed creating a single standardised template under the CMU for large bond issuers to make it simpler for both firms and investors.
Thomsen said analysis showed listed equities amounted to just 68% of gross domestic product in Europe compared to a ratio in the U.S. closer to 170%. Euro area private sector debt securities are 85% of GDP compared to above 100% in the U.S.
Thomsen said the IMF is proposing “a major additional step (beyond EU plans) of instituting centralised standardised and compulsory electronic reporting for all issuers, not only large issuers, on an ongoing basis.”
The fund is also looking for regulatory oversight to include “ex-post enforcement” to deter misconduct and be “deeply intrusive” for Central Counter Parties and complex investment funds important to the wider financial system.
However a more restrained approach could be taken to purely equity-based parts of the market that in theory should cause little contagion if they collapse.
“I would like to stress the importance of proportionality,” Thomsen said.
(Reporting by Marc Jones. Editing by Mike Harrison)