To better serve our dealers and their customers, Wacker Neuson offers competitive finance and lease programs that help them get the most machine for their money. It is against the backdrop of such an exceptional decline in capital formation that we have to analyse investment financing in Europe. I will offer some remarks on three issues: the need to diversify the European economy’s sources of financing and overcome financial markets fragmentation; the challenges of the Capital Markets Union (CMU); and some key issues that come up in financing infrastructures.
The European Commission proposal unveiled last February to establish a Capital Markets Union by 2019 has among its primary objectives the broadening of non-bank sources of financing and lowering barriers to cross-border investment. Moreover, as economies develop, capital markets become comparatively more important because they improve investors’ portfolio choices and risk management techniques and broaden the set of financing tools available to borrowers. Equity financing can also be supported by tax incentives, targeted for instance to innovative firms or venture capital investors.
As a result of the political push towards more diversified and integrated national financial systems, going forward, capital markets and non-bank financial institutions will have to take on a larger role in corporate financing in Europe and remaining obstacles to cross-border investments will have to be overcome. I have often underscored the fact that the benefits expected from the CMU can be magnified by exploiting the complementarities between bank financing and market financing.
By enlarging the pool of financial instruments available to households, the CMU creates incentives to allocate savings out of bank deposits; it may also contribute to narrow banks’ margins on loans to households and firms, to the extent that borrowers gain access to a larger set of alternative financing solutions. Third, non-bank debt finance has to become a structural component of corporate financing alongside bank lending and equity.
Equity financing is best suited for higher risk and innovative projects, that display strong information asymmetries and mostly translate into intangible assets; the low availability or lack of tangible assets to offer as collateral for debt finance is a serious issue, especially for start-up firms. This is a form of financing that allows firms to directly place their bonds with institutional investors and other qualified market participants at a lower cost than that of issuing securities to the public.