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Continued action on the capital market union: framing more deregulation and financial risks?

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The EU has continued to expand its policy and regulatory framework, referred to as the  Capital Market Union (CMU)(opens in new window) , to promote capital investment rather than bank loans. On 8 June 2017, the European Commission (EC) launched its so-called Mid-Term Review Action Plan(opens in new window) with the purpose of finalising the CMU by 2019, when the current Commission and European Parliament period is over.

The first phase of building the CMU was finalised on 31 May 2017 when the European Parliament and the Council of Finance Ministers agreed, after a long process with huge disagreements, on two flagship Regulation(opens in new window) s to stimulate standardised securitisation(opens in new window) , i.e. packaging loans (e.g. for mortgages or sustainable projects) to investment funds whose shares are then sold to investors. This would remove most but not all the credit risks from banks’ balance sheets and spread them into the financial markets, creating risks similar to those that created the 2008 financial crisis. The CMU Mid-Term Review Action Plan goes a step further and the EC will present measures to securitise non-performing bank loans and issue new financial products for infrastructure loans, in order to sell them to the (institutional) investment market. This would relieve the banks’ balance sheet from the bad or risky loans, which many think are preventing them from lending to the economy. However, as a result the risks and bad loans are transferred to investors rather than that banks writing off their loans – resulting in less profit for their shareholders but less debt burdens for households and thus stimulating demand. The EC mentions in its staff working document (opens in new window) that interested investors are hedge funds. No mentioning is made of the fact that hedge funds can be so-called ‘vulture funds’ that buy up bad loans at much reduced value and then require full repayment by the defaulting lenders.

As part of the CMU review, the EC outlined(opens in new window) a range of priority actions, including:

Some proposals will affect citizens directly:

The details of the proposed measures, policies and regulatory frameworks actually reveal quite a few changes that would make existing regulation less strict and infuse more risks and instability into the financial sector. They are framed in such a way that they stimulate the economy, including small and middle enterprises (SMEs), but in fact seem to be more oriented on meeting the needs of large financial investors and banks, and on making the financial sector more competitive – not more safe. NGOs have complained and documented(opens in new window) that their views were not being taken into account during the consultation for the mid-term review.

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