The European Union will ease capital rules it has imposed on banks and insurers since the financial crisis to help markets raise more funds for reviving sluggish economic growth.
The bloc’s financial services chief, Jonathan Hill, announced his “action plan” on Wednesday, made up of 33 measures and legislative initiatives that will put in place the building blocks of “capital markets union” or CMU by 2019.
European companies tap banks for up to 80 percent of the funds they need to grow, and Brussels hopes its planned reforms will switch some of this heavy lifting to markets.
It would be the first instance of regulators going back on regulation introduced during the financial crisis in a sign of how policymakers concern has switched to reviving growth.
“I want to knock down barriers to make it easier for capital to flow freely across all 28 member states,” Hill said in a statement.
Early initiatives include making it cheaper for banks to sell high quality securities based on the pooling of loans such as mortgages – known as securitization – to institutional investors.
He also wants to encourage insurers to invest in infrastructure such as roads and digital networks by cutting their capital charges on such investments by about a third.
Reviving Europe’s securitization sector to pre-crisis levels would raise €100 billion to €150 billion ($112-$169 billion), the European Commission said.
So far, regulators from elsewhere in the world have not said they will also cut capital charges on banks who originate securitized debt in their jurisdictions.
Securitized debt based on low quality U.S. home loans became untradeable in 2007, helping to spawn the crisis, but Hill said the EU measure would focus only on the use of high quality loans to create “simple, transparent and standardized” (STS) debt to qualify for the 25 percent cut in capital charges.
Banks will also be forced to retain at least 5 percent of the securities they create, to try to discourage the packaging and selling of bad loans seen as a key factor of the subprime crash in the United States.
Some 70 percent of existing pooled debt would meet the “STS” criteria, the European Commission estimated.
Hill’s other quick wins include making it easier and cheaper for companies to issue bonds and shares.
Absent from the plan is any attempt to centralize supervision of markets further at the EU level, a step some policymakers see as necessary to drive through changes, but which would go down badly in Britain ahead of its referendum of EU membership, due by the end of 2017.
Hill said he wanted to avoid the huge political distraction that institutional changes would bring.
More medium term aims include tackling politically sensitive issues such as trying to harmonize tax and insolvency laws in the EU, areas that are typically member state domains.
Financial industry trade bodies generally welcomed the CMU plans with the British Bankers’ Association, representing lenders in Europe’s biggest market, saying it was “pragmatic” with clear deadlines.
But policymakers have said that creating a CMU will be as much about changing attitudes as reforming market practices.
Critics also say Brussels will have to persuade consumers in Continental Europe, long accustomed to squirreling away cash in a deposit account, to invest in riskier shares and bonds.
Burkhard Balz, a senior German member of the European Parliament, said banks should continue to play a central role in funding smaller companies and called on Hill to act faster.
“We do not want to Americanize businesses’ access to finance. The desired results will not be reached if we act at a snail’s pace,” Balz said.
Hill said there was no intention of “copying and pasting” the U.S. system onto Europe.
“CMU is ambitious. I hope the Commission can maintain its resolve to make it work,” Wim Mijs, chief executive of the European Banking Federation, said.
Insurers showed less enthusiasm. While welcoming the plan as a step in the right direction, Insurance Europe, the sector’s main lobbying group, warned that “these changes are not enough to remove the barriers to investment by insurers,” as capital charges remain too high.
Monique Goyens, director general of The European Consumer Organization, said there was a need to restore consumer trust in financial services first if Hill wanted people to open their wallets to help build a CMU.
Hill’s action plan makes no mention of specific targets for measuring whether CMU reforms are successful.
(Reporting by Huw Jones; Editing by Alison Williams)
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