Morgan Stanley’s former second-in-command has warned that Europe’s capital markets are “not fit for purpose” and Brexit will make the situation worse.
Colm Kelleher, one of Europe’s most senior bankers until he retired as president of Morgan Stanley last year, offered his brutal assessment at a private dinner in Dublin last week attended by officials from Ireland’s central bank, as well as international investors and finance executives.
“European capital markets are still not fit for purpose,” Mr Kelleher said in a pre-dinner speech. “They are neither large nor deep enough to support economic growth or to buffer it in hard times. Brexit amplifies the challenge.
“The City of London is the world class portal through which global capital enters and exits the EU. No other EU country has had to think about the requisite legal and physical infrastructure. Now that portal is closing.”
The EU has spent more than five years working on its capital markets union plans. The goal is to make it easier for businesses to raise money on public markets across the EU and reduce their reliance on bank funding.
Brexit has held up development, although some progress has been made. In 2008, non-banks accounted for 14 per cent of loans to big companies. That has roughly doubled in a decade, according to the European Central Bank.
But Luis de Guindos, vice-president of the ECB, said in January that “from a global standpoint, European capital markets are too small and fragmented”.
Mr Kelleher, who is now a senior adviser to Morgan Stanley, also highlighted fragmented regulation and infrastructure as a problem that “constrains capital mobility”.
The EU has more than 25 exchanges, 17 clearing houses and 19 central securities depositories.
The UK’s decision to leave the EU, taking the EU’s largest capital market out of the union, was a huge problem, he said. “Brexit risks transforming capital markets in the EU,” Mr Kelleher said, noting that business would now be dispersed across several countries “losing the economies of scale and liquidity that London provided”.
To make capital markets union work, Mr Kelleher said, Europe needs a single supervisor, as it has for banking with the ECB, and one rule book on insolvency and debt.
European pension reform would also stimulate capital markets, he added, as would greater openness to foreign capital.