Last month, European Central Bank (ECB) data showed European banks expanded lending to businesses by 1.1 percent in the past year, the fastest rate of expansion in four years. More good news, the ECB bank lending survey revealed improving credit conditions for business lending.

However, performance across countries varied with strong loan growth in Germany and France and continued declines in lending in southern countries. Further, European bank stocks still remain far off last year’s high, weighing on a sector facing economic headwinds, regulatory demands, and legacy issues still on balance sheets.

It’s in this context that the European Union (EU) is seeking to develop the Capital Markets Union (CMU). While the focus is often on the critically important task of unlocking nonbank financial lending capacity, banks have a critical role to play within a CMU to ensure credit flows to businesses in good times and bad. Regulations should recognize banks’ role and ensure rules do not inhibit the sectors ability to support EU business expansion.

This paper examines the role of banks today in supporting European economic growth as well as in a future CMU. Key highlights include:

  • The Capital Markets Union (CMU) is a long-term project that leaves EU businesses mostly bank-dependent in the near-term.
  • It is essential that regulators recognize banks’ unique role in insuring deep, liquid capital markets.
  • Regulation that stifles market making by banks may ensure they survive a future crisis, but risks hampering their ability to support businesses when needed most.