Building a capital markets union

Jun. 21, 2015

On April 20, 2015 the Swedish House of Finance commented on the EU-Commission’s Green Paper “Building a Capital Markets Union”. In our comment we focused on two points that, from our perspective as financial economists with a particular knowledge of the Swedish financial system, seem important not just for the Swedish capital markets but also for the entire EU-area.

Within the framework for a European Capital markets union the question of how to make European bond markets more liquid in the future is of great importance. Improving liquidity in debt markets is an important building block in creating a well functioning Capital Markets Union that can deliver growth and more jobs.

We believe that there are obstacles to bond funding in Europe that should be removed and we also think that it would be desirable to have a higher share of bond funding in Europe. Better access to bond markets would expose banks to competition and lead to lower borrowing costs. We recommend the Commission to take action to improve the procedures for insolvency resolution in Europe in order to strengthen the position of bondholders, provide a fair and transparent system for resolving distress for viable businesses, and hence to create the potential for a corporate bond market that can promote funding and economic growth in Europe, including for higher risk firms.

Our other point relates to the market making system and new regulations. The wave of regulations after the financial crisis in combination with extremely low or negative interest rates have made it difficult to make money as a market maker in the money and bond markets. We feel that this is a problem that needs to be addressed. In order to have well-functioning cross border flows of capital within the EU, liquidity in the primary and secondary markets for bonds (as well as equities) is an important ingredient.

There are at least three options going forward:

1. We can leave the market structure in bond markets as it is today. It seems likely that it will function less well than before.

2. We can lower the capital charges on dealer portfolios in order to make them profitable again in order to keep the liquidity in the markets intact and

3. We can consider transferring bond trading to an order driven exchange much like equity trading.

Within the framework for a European Capital markets union the question of how to make European bond markets more liquid in the future is of great importance. Improving liquidity in debt markets is an important building block in creating a well functioning Capital Markets Union that can deliver growth and more jobs