European Capital Markets

The third area of priority for CMU should focus on broadening and deepening the funding mix of euro area firms and households. This is particularly important for the transmission of monetary policy.

Today, firms in the euro area predominately rely on bank lending for their debt financing, although the importance of non-bank financing has increased over the past ten years. The latest data indicate that bank lending accounts, on average, for around 55% of debt financing of euro area firms. In the United States, by contrast, firms source around 70% of their debt financing directly from non-banks, and only 30% from banks.

In principle, bank and market-based finance tend to support economic development and living standards in similar ways. But the euro area sovereign debt crisis, and the subsequent impairment of the bank lending channel, underlined that what matters for resilience and growth is that funding is diverse and avoids concentration risks.

Clearly, market financing is still too rare in the euro area and too restricted to large companies. According to the most recent survey on the access to finance of enterprises (SAFE), for the period from October 2018 to March 2019, only 11% of small and medium-sized companies (SMEs) have considered taking on equity financing, and only 3% issued debt securities.

SMEs have therefore increasingly sought to raise capital outside of public capital markets. Private equity investors, in particular, have partly filled the void left by financial markets. Their investment has increased considerably in recent years and has also benefited many young and small companies.

In 2018, total equity invested in European companies increased by 7% to €80.6 billion, the highest level recorded to date. The number of companies receiving equity investment also reached its highest level, also increasing by 7% to over 7,800 companies. 86% of these were SMEs. Venture capital investment, which is particularly important for young innovative firms, stood at a historical high of €8.2 billion, funding a record 4,400 companies.

But because the United Kingdom is home to around one-fifth of the EU's private equity funds, Brexit may disrupt private equity investment as non-EU private equity funds can only be marketed in the EU under strict conditions.

In order to fill the gap left by the possible loss of UK private equity funds, we need to harmonise the myriad of existing national requirements and ensure that EU-based funds and managers are allowed to reap the full benefits of the single passport and market their products to all suitable EU investors.

All this suggests that more needs to be done to further diversify external funding of euro area firms, in particular for SMEs, which are typically the first to suffer from tightening credit conditions when the tide turns and risk aversion rises. This relates to both market integration and market development.