Despite Brexit, EU makes progress on capital market plan

[December 08, 2016]  By Francesco Guarascio

BRUSSELS (Reuters) - A European Union plan to bolster its capital markets received a boost from two preliminary deals to revive the credit sector, EU officials said on Thursday, a sign that Britain's vote to leave the bloc may not hamper the project.

Last year the European Commission unveiled a plan for a "capital market union" (CMU) by 2019 to smooth the movement of capital across national borders and reduce the EU economy's pronounced reliance on banks for loans.

Wrangling among EU states and lawmakers over some of the proposed measures and the June Brexit referendum, which might deprive the bloc of its main financial hub, London, weakened the plan and raised fears for its very survival.

But on Thursday, EU lawmakers overcame internal divisions and gave initial backing to measures to boost the market for asset- and mortgage-backed securities in a bid to raise banks' lending capacity and support economic growth.

The move followed a deal reached on Wednesday on another plank of the CMU plan, a proposal to exempt more companies from having to issue a costly formal prospectus for investors - a step to spur more market-based financing across the region.

The president of the EU Council of finance ministers, Peter Kazimir, hailed the two accords as "extremely important steps for the CMU".

The deal on the prospectus regulation was reached after lengthy talks among EU states and lawmakers. Its final approval is now considered a formality.

Under the compromise, smaller companies will be able to raise up to 1 million euros from markets without a prospectus, 10 times more than the current 100,000-euro threshold.

Thursday's vote of the parliament's economic committee on securitization, the process through which banks pool and sell loans, was a first crucial step after months of disputes but needs the backing of EU governments before it can become a law.

European Union (EU) flags fly in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 3, 2015. REUTERS/Ralph Orlowski/File Photo

The securitization plan aims at reviving a 200 billion euro market that has fallen to about a quarter of its 2008 peak, but changes made by the Parliament to the original proposal may hamper the market take-up.

Lawmakers increased controls over banks issuing securities and raised from 5 to 10 percent the retention rate for some of the debt they create.

These steps are meant to discourage lenders from packaging too risky securities, the lawmaker responsible for the plan, center-left Paul Tang, said, recalling that the sector was at the root of the 2007-08 global financial crisis.

The financial industry criticized the deal. Richard Hopkin, of finance lobby group AFME warned the changed rules "will discourage the use of securitization".

Frederic Hache, analyst at Finance Watch, a private watchdog, said the rules might not help smaller companies and cautioned against risks of new "real estate bubbles".

(Editing by Mark Heinrich)

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