IMF Urges Europe to Fix Fractured Capital Market as Brexit Looms (Bloomberg)
Last Modified: 06:30 AM, Tue Sep 10, 2019

Alexander Weber and Silla Brush

Bloomberg. 10 September 2019

Word Count: 436

(Bloomberg) -- The European Union should step up efforts to create a single capital market and keep a close financial relationship with the City of London even after Brexit to avoid disrupting financing once the U.K. leaves the bloc, the International Monetary Fund said.

As the bloc tries to open up more funding sources for companies, it should refrain from shutting out foreign financial markets like the U.K. after its departure, staff at the Washington-based institution said in a note published on Tuesday. Progress is also needed in many other areas to increase diversity in Europe’s financial market, the IMF said.

“The EU must maintain close regulatory cooperation with non-EU countries on all capital market issues,” the IMF said in the note, due to be presented in Brussels Tuesday. “This would apply in particular to a post-Brexit United Kingdom, given its tight financial links” with the 27 remaining EU countries.

After the financial crisis a decade ago, European officials tried to find ways to reduce reliance on bank funding, which can be hard to obtain when the economy is in trouble. They have sought to harmonize capital markets that have evolved along national borders for decades, including in sensitive areas such as insolvency frameworks, but the project remains incomplete.

The U.K.’s departure compounds the challenge because it will likely disrupt trading while leaving the bloc without its single biggest financial market. According to the IMF, moving from a system with London as a hub to a more spread-out network of smaller financial centers may also lead to a loss of efficiency.

The EU has already moved to tighten the system that allows foreign financial firms to access its market. Countries should expect a “rigorous” assessment of their regulations before companies that are based there will be allowed to serve clients in the region, the EU’s executive arm said in July.

The IMF researchers conducted a survey of investors and European regulators and found that both view the U.K. as Europe’s leading capital market, whether in terms of regulations, bankruptcy laws, tax rates or basic market data. Respondents said the rest of the EU suffers from administrative burdens.

National governments across Europe are likely to compete over finance post-Brexit and could even engage in “regulatory arbitrage,” the researchers said.

While reforms of the capital market have been a priority for several years, Ursula von der Leyen’s incoming European Commission is facing growing calls to do more. Finance ministers from the bloc are discussing a “reboot” of the so-called capital markets union project at a meeting in Helsinki this week.

To contact the reporters on this story: Alexander Weber in Brussels at aweber45@bloomberg.net;Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Marion Dakers

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Slugline: BC-IMF-Urges-Europe-to-Fix-Fractured-Capital-Market-as-Brexit-Looms