EU Plans to Eliminate Dependency on Banks for Funding

The European Union (EU) plans to empower its member states so that they can consider non-bank options to get the required finances and to eradicate hurdles to cross-border investments. Jonathan Hill, the financial services chief of the bloc, will unveil these plans the following week.

According to the plan, the EU will prioritize on supplying a wider choice of funding for firms, boosting the lending quality of banks, creating better regulations to encourage investors to invest in infrastructure projects, providing better choices for institutional and retail investors, and eradicating investment barriers among all the 28 countries that form part of the bloc.

In addition to releasing the above-mentioned action plan, Hill plans to launch measures to rejuvenate the securities market and proposals to create a “pan-European framework for covered bonds.”

Some of Hill’s chief tasks are to provide a wider range of funding options for all firms, especially the mid-sized and small-sized ones, which are now completely dependent on banks. His draft states:

Rapidly expanding firms, with high growth potential but limited working capital, may encounter funding gaps at critical moments in their expansion. Bank overdrafts or short-term borrowing facilities alone often cannot meet these needs.

The proposal to rejuvenate the securities market focuses on encouraging the growth of standardized and simple asset-backed products that would quickly get regulators’ approval.

The draft further says:

If EU securitizations could be revived—safely—to pre-crisis average issuance levels, banks would be able to provide an additional amount of credit to the private sector of more than 100 billion Euros ($112 billion). And if SME securitization was rebuilt to half the crisis peak, it could generate 20 billion Euros of additional funding.

The draft suggests creating insolvency legislation and “building on national regimes that work well to ensure that all member states have a best-in-class insolvency framework” by the end of 2016.

The draft also says that the EU has long-term plans of exploring ways to widen retirement saving choices and to build a market for private pensions that providers of pensions can choose while offering private pension schemes throughout the EU. There are also plans to identify ways of reducing cross-border barriers to settling and clearing trades.

According to the draft,

differences in the national treatment of third-party effects of assignment of debt claims complicate their use as cross-border collateral and make it difficult for investors to price the risk of debt investments, which frustrates economically significant financial operations.