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Can a European Capital Market Survive Brexit?

Howard Davies, (2018), “Can a European Capital Market Survive Brexit?”, Project Syndicate, 2 Μαΐου

Almost 60 years of European construction had still not created anything approaching a single market for investment, and in many EU countries capital markets remained weak and underdeveloped. The worthy aim, Hill wrote, was “to identify the barriers to the cross-border flow of investment,” and “work out how to overcome them step by step.”

There are structural and historical reasons for the different role played by EU banks, and one should not expect European capital markets precisely to follow the pattern of their North American counterparts. In the so-called Rhineland model, banks are often very close to their corporate clients, and sometimes own stakes in them. But the aftermath of the financial crisis showed the importance of diversified funding sources for companies.

Total funding of EU companies fell from 112% of GDP in 2006 to 106% in 2016, owing to a sharp reduction in bank lending, which dropped by a fifth in real terms. Bank lending fell a little in the US, too, as banks sought to restore their balance sheets and rebuild their capital strength. Tighter bank regulation made that inevitable, and a considerable proportion of the post-crisis improvement in capital ratios was driven by a reduction in lending. But in the US, the capital markets were able to take up the slack, and total funding available to companies has risen, powering a more robust economic recovery.

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