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Deepening European Capital Markets 

January 4, 2016

Joel Ntamirira, The Market Mogul

The US economy has come a long way since the financial crisis, far surpassing the progress made by its European counterpart. The Federal Reserve gave the economy the ‘golden stamp’ of approval when the FOMC opted to increase the funds rate to 50 basis points, the first rate increase since 2006. Whilst the Fed is moving towards monetary policy normalisation, Europe is still maintaining life support monetary policies, with no end in sight. One of the greatest advantages for the Americans going in to the crisis was the breadth and depth of its capital markets. In addition to the sovereign debt crisis, Europe faced supplemental hardship due to its reliance on a bank based lending model.

Fundamentally, the credit extension model in the US vastly differs from that of Europe. Bank lending makes up for 80% of credit in the EU, whereas that is 25% in the US. Goldman Sachs’ Co-Head of Global Financing Group Jim Esposito highlights that more capital/liquidity requirements for banks will result in less return on capital and arguably smaller banks in future, therefore a ‘bank dominated credit model is a cause for concern’. Building a strong capital markets union is one of the EU’s core missions, in a quest to make it easier for businesses to access funding and foster growth in the EU. The EU economy is about the same size as the US, but the equity markets are less than half the size, and debt markets less than a third. Read more

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