EC unveils Capital Markets Union action plan

The European Commission has proposed a new framework for securitisation as well as new legislation to reduce capital charges for certain infrastructure and fund investments.

The European Commission will try to reboot the securitisation market as part of a set of measures aimed at tackling investment shortages in Europe.

It has also proposed legislation to reduce the amount of capital that institutional investors will have to hold against debt and equity investments, in both infrastructure and managed funds.

The governing body announced the measures today as it launched its Capital Markets Union (CMU) action plan, set up to address the fragmented nature of the Eurozone markets. The aim of the initiative is to look at ways Europe can diversify its funding sources for long-term projects and businesses, particularly small- to medium-sized enterprises.

Addressing securitisation, the EC said it would introduce a new framework including amendments to banking regulation (Capital Requirements Regulation). The objective is to free up capital from banks for new lending. According to EC estimates, if EU securitisation issuance is built up again to the pre-crisis average, it could generate between €100 billion and €150 billion in additional funding for the economy.

The overall objective of the new securitisation framework will be to attract a broad and stable investor base, such as non-bank institutions, to areas in the economy where it is most needed, the EC said.

The funding tool, which still carries a stigma as a result of its role in the US subprime crisis, will be promoted to be more ‘simple, transparent and standardised (STS)’ than previously however, with the EC saying it “does not intend to go back to the ‘bad old days’ of opaque and complex subprime instruments which caused fire sales, price drops and illiquidity.”

Under a new set of proposals for Solvency II regulation, certain investments by insurance companies are set to benefit from a lower risk weighting, ultimately leading to lower capital charges. The amendments will also allow investments in European Long-Term Investment Funds (ELTIFs) to benefit from lower capital charges.

The EC estimates that EU insurers have almost €9.9 trillion invested on behalf of policy holders. Of that, around €22 billion is invested in infrastructure projects, representing less than 0.3 percent of their total assets. Increasing this figure to 0.5 percent would mean an extra €20 billion of investment, the EC estimates.

The capital charge related to qualifying investments in the form of bonds or loans will be reduced for various maturities and credit quality steps. For example, the capital charge on a 20-year bond could fall by a third, from 30 percent to 20 percent, depending on credit quality. The EC has extended amendments to equity capital charges to avoid an undesirable disinvestment from equities.

The EC alongside the European Insurance and Occupational Pensions Authority (EIOPA) said that it would further examine charges for ‘infrastructure corporates’. Other measures under CMU include proposed changes to the prospectus directive before year end, with a view to making it more efficient for SMEs to raise capital; consultations on venture capital funds and covered bonds; and a ‘call for evidence’ on the cumulative impact of financial legislation.