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CMU proponents call for increased efforts as Brexit looms

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It was meant to be a major gathering of the EU’s friends and followers to assess the performance so far of the Commission’s Capital Markets Union (CMU) programme.

“Most notably, we must devise and implement this [CMU] programme at a time when our largest capital markets hub is leaving the single market.”

- Valdis Dombrovskis

The aim was to gather suggestions for revamping the flagship initiative during the next two years. Friendly comments on progress of the common rules for a company’s tax base might have been expected. Or how to nudge forwards the promising securitisation regulation, which is at present suffering unexpected delays.

In fact, the public hearing on the CMU’s mid-term review was quickly overshadowed by the dark cloud that is Brexit – and a possible breakdown of legislative cohesion across the economic zone. The fear was that some of the other 27 member states could fail to uphold Brussels-based standards.

The well-attended conference – held in Brussels’s prestigious Charlemagne building – heard that there was a clear need for EU institutions to head off this hazard. It could seriously impede cross-border investments by the institutional sector.

Commission vice-president Valdis Dombrovskis said: “Most notably, we must devise and implement this [CMU] programme at a time when our largest capital markets hub is leaving the single market. London has traditionally pooled and managed liquidity from across Europe, and provided most of the financial risk management to the rest of the continent.

“The prospect of Europe’s largest financial centre leaving the single market thus makes our task more challenging, but all the more important. The rest of the EU economy needs bigger and better capital markets more than ever to complement bank lending with other sources of funding. We therefore need to redouble our effort to build the functioning Capital Markets Union across the EU-27.”

Brexit had “powerful implications for the CMU”, said Guntram Wolff, director of the Brussels think tank Bruegel. He also warned of a need to address the possibility of increasing costs of finance and financial instability.

Jyrki Katainen, commissioner for jobs and investment, echoed Dombrovskis’ comments: Brexit meant “we need to redouble our efforts”, he said. He referred to “underperformance of the EU’s capital market” and suggested that upgraded risk finance could fill the gap. Responses to the CMU’s mid-term review were revealing its importance, he said.

Dombrovskis cited the need for “trusted and timely” effective supervision, performed to the same standard across all participating markets. He warned of the value protecting investors from “predatory behaviour from unscrupulous actors in jurisdictions with lax supervision”.

There were warnings of a “race to the bottom” by opportunist jurisdictions: National ministries could be motivated to cheat in efforts to increase their share of financial business lost from London.

This led Dombrovskis to mention a public consultation on the operations of the European Supervisory Authorities , which is running until mid-May. He described it as “a very important conversation about the supervisory architecture that we need for the future CMU”.

An evidently determined Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), described consistent supervision across the EU as “a very important condition” to support the CMU.

There was a need “to address cross-border risks, especially those related to investor protection. Investors are only willing to participate in financial markets when they are well-protected”, Maijoor said.

Maijoor added that ESMA’s focus shifted to supervisory convergence, or to achieve “stronger powers to ensure consistency across the EU”.

“This would allow more effective and timely intervention to promote convergence of practices across the EU, while different combinations of tools might be needed to address specific convergence issues,” he said.

John Berrigan director-general for financial stability and the CMU at the EU Commission, added that strengthened supervision was needed to support a scale-up of the CMU’s volume of finance.

After such conferences, delegates tend to collect in small groups, wishing each other a cheerful goodbye. In contrast, delegates this week left the Charlemagne building reflecting on an atmosphere of concern.

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