A primary consequence of the international financial crisis was the sudden slowdown in the supply of credit in financial markets. This highlighted the importance of the vulnerabilities accumulated over the last decade of economic and financial expansion in many countries, both developed and emerging, which, through a clear domino effect, resulted in a deterioration of domestic financing for businesses and households. The response of the main central banks was initially to apply traditional expansionary monetary measures which, when pushed to the limit, were followed by non-orthodox ones, such as setting negative interest rates and purchasing debt directly in the markets. These measures have been highly successful in increasing global liquidity, with strong growth in the supply of credit between countries and in foreign currency.
The consequence of all the above has been the observed change in the configuration of the international credit supply. Bank loans lost importance as a result of the adjustment process in the banking sector, which was subjected to a strict regulatory and supervisory framework. Conversely, the issuance of private and public debt has been favored by the increase in global liquidity in an environment of zero or even negative interest rates, with the dollar as the predominant currency in international debt issues. All of this has meant that financing conditions for the public sector and large companies are now much more sensitive than in the past to the behavior of financial markets and US monetary policy decisions. Meanwhile, banks, having reduced their presence in international financing markets, passed on the significant improvement in financing conditions to companies—especially SMEs that did not have access to wholesale financing—and to households.
In 2015, the European Commission launched a plan to create a true single capital market. The objectives pursued were to encourage diversification away from bank financing, increase market depth and liquidity, and ensure it is truly common to allow for greater efficiency and integration in the financing of the European economy. The most recent data, undoubtedly affected by decisions made by central banks in the recent past, show clear contradictions in the achievement of these objectives. It is true that liquidity has increased in the markets, but this has not been matched by greater integration; the rise in financial asset prices has been compatible with the reality that economic growth continues to rely basically on financing provided by banks. Recent instability in international financial markets has accentuated this latter conclusion, with European banks beginning to recover some of the weight lost during the crisis in the composition of the European financial sector over the last year.
What is needed to achieve the Commission’s objectives? Our authorities must create the conditions for an improvement in long-term and more sustainable financing, apply rigorous regulation and supervision to the non-bank financial sector to prevent risks in financial markets, and promote the elimination of barriers between countries. Completing the banking union is undoubtedly a decisive step toward creating a common market for capital and financial services. It is also essential to eliminate, sooner rather than later, the extreme non-orthodox monetary policy measures applied during the crisis, thereby combating the risk of distortions in financial asset pricing and protecting the banking stability that is essential to continue underpinning economic growth.
