The European Commission (EC) has adopted a green paper that launches a three-month public consultation on how to foster the supply of long-term financing and how to improve and diversify the system of financial inter-mediation for long-term investment in Europe.
Long-term investment represents spending that enhances the productive capacity of the economy. This can include energy, transport and communication infrastructures, industrial and service facilities, climate change and eco-innovation technologies, as well as education and research and development. Europe faces large-scale long-term investment needs, which are crucial to support sustainable growth. To fund long-term investment, governments, businesses and households need access to predictable long term financing.
The EC added that the financial crisis has affected the ability of Europe’s financial sector to channel savings to long-term investment. The green paper, entitled ‘The Long Term Financing of the European Economy’, focuses on how the process to improve the availability of long-term financing operates.
One of the important questions is whether Europe’s historically heavy dependence on banks to finance long-term investment will and should give way to a more diversified system with significantly higher shares of direct capital market financing (i.e. bond finance) and greater involvement of institutional investors (e.g. pension funds) or to other alternatives. Financing needs of small to medium-sized enterprises (SMEs) deserve particular attention as they have the potential to underpin long-term growth and need access to bank as well as non-bank financing.
Responses to the consultation will help the Commission determine what can be done to overcome the barriers to long-term financing.
“We need to identify what barriers exist to long-term financing and what more can be done to overcome them,” said European internal market and services commissioner Michel Barnier.
Economic and monetary affairs commissioner Olli Rehn added: “The necessary rebalancing process in the European economy is underway, and financial markets should be able to support the accelerating structural change. It is important to ensure that the framework for long-term investment and financing is comprehensive and flexible enough to adapt to these challenges in order to strengthen Europe’s growth potential.”
The green paper was welcomed by the Association for Financial Markets in Europe (AFME), whose chief executive officer (CEO), Simon Lewis, commented: “In Europe, businesses have traditionally relied on bank funding rather than accessing the capital markets. Finance through the securities markets is much less developed and additional capital markets channels need to be expanded to ensure economic growth.
“The Commission has prioritised the need for expanded non-bank investment in infrastructure, small and medium-sized enterprises [SMEs}, project bonds and other products. The paper rightly focuses on corporate investment. However, there are additional important product areas, such as increased capital markets funding for housing, including residential mortgages, and other high quality consumer assets, as these free up bank balance sheets for further lending to SMEs and other corporates through securitisation and other channels.
“It is also important that non-bank institutional funders have appropriate incentives in place, in addition to product expertise and controls, to invest in large amounts of bespoke, less liquid and long term instruments.”
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