Limited progress has been made to support the development of EU capital markets, which is why the determination shown by policymakers in pursuing this agenda is to be applauded. The reason why the Capital Markets Union (CMU) project continues to be a good idea – and why it is so important to Europe’s future economic success – is that there are still massive unrealised benefits to be drawn from deeper and more diverse European capital markets.

The need for the CMU is well described in the Final Report of the European Commission’s High Level Forum. European businesses often lack access to the capital needed to finance innovation and growth, even if some parts of the market may feel 'overbanked'. These same businesses require significant long-term investment as they transition to more sustainable models. Increased participation of European citizens in the capital markets is also needed to provide comfortable retirements for a continent with an ageing demographic.

Diversifying the European economy away from its dependency on bank financing also promotes economic resilience. Access to credit is a vital tool for SMEs to insulate themselves against adverse market shocks. We are, unfortunately, seeing this in real time as businesses are forced to close or reduce trading in response to measures to contain the COVID-19 virus. Beyond this immediate issue, greater diversity of financial providers will also help European businesses compete with their international counterparts. The departure of the UK from the European Union adds urgency to the perennial need to reform cross-border finance within the EU and reduce the dependency of business on national banking markets.

One of the key findings from the Alternative Credit Council’s (ACC’s) most recent Financing the Economy research was that while half of private credit managers expect to grow the amount of capital they invest in European businesses over the next three years, Europe also has the highest barriers to non-bank lending in the world. This means the amount of capital deployed will continue to be below the real potential unless the non-bank finance regulatory infrastructure changes. 

Nurturing capital markets requires a combination of political ambition and targeted policy interventions. The European Long-Term Investment Fund (ELTIF) Regulation is one area where these two can usefully meet. The ELTIF framework was established five years ago to support the flow of finance from capital markets to the real economy.  It was intended to be a vehicle that would also give retail investors the same opportunities as their institutional counterparts in reaching into the private debt and equity markets.

Rather than developing yet another novel scheme for loan funds, private equity or venture capital, policymakers should focus on fixing what hasn’t worked. The sluggish growth of ELTIFs, despite the growing demand for lending-based investment strategies in Europe, highlights how this was a missed opportunity that should be remedied. This is not just theoretical. ELTIF’s US cousins, the Business Development Companies, have provided SMEs with more than $100bn of finance via 12,000 loans and equity investments over the last decade. Despite its current shortcomings, the ELTIF Regulation does contain many positive elements, such as the ability to originate loans on a cross-border basis. This and other favourable characteristics can be built on to one day match the scale of BDCs. The potential is clearly there.

The ACC has published a position paper outlining a series of policy recommendations to realise the potential of the ELTIF regime. A well-functioning ELTIF framework will connect capital markets with the real economy and provide European citizens with greater returns on their savings and investments. The ACC looks forward to working with policymakers to implement the reforms needed to realise this vision.

To request a copy of the ACC’s position paper on ELTIF, please contact [email protected]