EU urged to tackle insolvency laws for unified capital market

Brussels will need to tackle Europe’s fragmented insolvency laws and create more uniform shareholder rights if it wants to build deeper capital markets and speed up its economic recovery, an official expert group has warned.

The group, led by former eurogroup chief official Thomas Wieser, said on Wednesday that previous EU attempts to build a unified capital market through legislation had fallen short, while Brexit and the Covid-19 pandemic had made the project more urgent.

The European banking system alone could not provide sufficient credit for the EU economy to recover from the crisis, the report warned.

Authorities have long pushed for companies to use capital markets to fund their growth and become less reliant on borrowing from banks. Nearly 90 per cent of funding in 2018 came from bank lending, according to the Association for Financial Markets in Europe. Attempts to build a more harmonised Europe-wide market have often foundered on sensitive issues such as local bankruptcy laws.

The forum of 28 executives, experts and scholars provided a series of “game-changing” recommendations for EU legislators. They included setting up an EU-wide register of listed company information to be accessible by potential investors, and loosening rules on research for small and medium-sized listed businesses.

The challenge of building a large, US-style capital market has bedevilled successive administrations in Brussels, with the cause becoming more urgent down the years as first the financial crisis, then the eurozone sovereign debt crisis strained banks in their traditional role as the overwhelming provider of credit to the real economy.

The issue has become more acute since the departure of Europe’s largest capital market, the UK, in January, with British politicians signalling they would diverge from Europe’s rules to remain competitive.

“The current financial system which is too bank-centric represents a major bottleneck for the EU economy going forward,” the expert group report, commissioned by the EU, warned.

Representatives on the forum included Lorenzo Bini Smaghi, chairman of Société Générale; Stéphane Boujnah, chief executive of Euronext; Leonique van Houwelingen, chief executive of BNY Mellon’s European arm; and Sylvie Matherat, the former chief regulatory officer at Deutsche Bank.

It also called on Brussels to change the rules to harmonise some non-bank corporate insolvency laws, so shareholders had uniform rights throughout the bloc and certainty about those rights.

Other parts of the plans included revisiting steps taken by the previous European Commission and going further, notably when it came to easing regulations so as to revive the market for securitised debt, and tweaking prudential rules to spur equity investments by banks and insurers. 

But the group acknowledged that it was irrevocably split on the key question of whether to back the creation of a single, centralised, capital markets supervisor, and its report did not make a recommendation on that issue. 

While some members of the forum argued that a central supervisor “would entail a risk of duplication of responsibilities”, others, including Mr Wieser himself, considered that the step was “essential to building a truly integrated and efficient EU market for capital”, the report said.

The commission on Tuesday said it would consult on the proposals before coming forward with an action plan in the autumn.