Update on CMU: heated debates on spreading the risks of loans

The flagship legislation to implement the Capital Markets Union (CMU) action plan (see previous newsletter) has been hotly debated in the European Parliament (EP). The legislative proposals for a simple transparent and standardised (STS) securitisation raised issues on how to avoid the risks of the packaged securitised loans spreading in an unsafe manner. These risks can be avoided in several ways.

Firstly, ensuring sufficient information to and scrutiny by investors buying the securitised products; secondly, avoiding overly complex products (“tranching”, synthetic securitisation); and thirdly, ensuring that banks which transform the loans into securitised products retain a part of the risk and are not selling off dodgy loans. While proponents argue that STS securitisation will allow more capital to flow around the EU to finance the economy, opponents highlight the risks of this form of shadow banking.

Eighty academics wrote a letter(opens in new window) about the flaws in the current proposal. The EP’s ECON committee is submitting amendments to the legislative proposals reported by MEPs Tang and Zalba by 20 and 22 July. This will be followed by a vote on the amendments, which can be monitored here(opens in new window) and here(opens in new window) . The amended proposal will form the basis for the EP’s negotiations with the Council of Finance Ministers (ECOFIN) for the final legal text.

Other aspects of the CMU plan are also progressing. The legal proposal, allowing a simple prospectus for issuing the shares or bonds of a small company, is likely to start being negotiated between the EP and the ECOFIN from the end of September 2016 onwards. Legal reviews(opens in new window) have been published for a lighter regulation of funds for young and innovative companies (the European Venture Capital Funds, the European Social Entrepreneurship Funds). Future CMU plans relate to easier cross-border selling of investment funds and corporate bonds or shares, and growth in personal pensions.

The tasks of Mr Jonathan Hill, the UK Commissioner responsible for introducing the CMU plan, have as of 16 July been taken over by Mr Valdis Dombrovskis, Vice-President of the Commission for the Euro and Social Dialogue. He has stated to the EP’s ECON Committee that he will continue taking existing CMU proposals forward. A group of civil society organisations has called to rethink the financial sector reforms, including by incorporating social and environmental aspects in the CMU proposals(opens in new window) .