New Financial

Report on ‘What do EU capital markets look like post-Brexit?


September 2016 • Topic: Unlocking capital markets • by William Wright


The latest report from New Financial puts some hard numbers for the first time on where capital markets in the rest of the EU stand without the UK. While capital markets in the EU27 are significantly smaller and less developed than in the EU as a whole, the report shows that there is a huge opportunity for the economy and for the capital markets industry in developing deeper capital markets in the EU beyond Brexit.

Download the full report here

The report measures the size, depth and growth of capital markets in the EU excluding the UK across 24 different sectors of the capital markets over the past decade. It also highlights the wide range in depth in capital markets between different countries in the EU27, and puts some hard numbers on the potential opportunity from developing capital markets in the EU27 countries. The report underlines how the EU’s capital markets union initiative is even more important than before in reducing the economy’s reliance on bank lending and diversifying sources of financing.

Some of the highlights include:

In absolute terms, the value of capital markets activity in the EU excluding the UK is around one quarter smaller than in the EU as a whole. This gap is most pronounced in equity markets (for example, the UK accounts for one third of all IPO activity in the EU) and pensions (where the UK accounts for 43% of all EU pensions assets).

• Capital markets in the EU27 are only half as deep relative to GDP as in the UK, and around one third the depth of the US. In every sector in our analysis except one (the value of investment funds by domicile), UK capital markets are deeper than in the EU as a whole. This effect is even more pronounced when you look at the location of capital markets activity in the EU: less than half of it takes place in EU27 countries, and in some sectors, such as hedge funds and trading, roughly three quarters of activity in the EU is conducted in the UK.

• This suggests the need for the EU’s capital markets union initiative is even more pronounced in the EU27 to help diversity sources of funding and wean the economy off its reliance on bank lending. There is a huge opportunity for growth in EU27 capital markets: closing the gap in depth with the EU as a whole would lead to an additional €2 trillion in pensions and insurance assets, more than €4 trillion in additional assets under management, and an extra €1 trillion in the value of both stockmarkets and corporate bond markets in the EU27.

Here is a full 10 point summary of the report: 

1. In absolute terms, the value of capital markets activity in the EU excluding the UK (EU27) is around one quarter smaller than in the EU as a whole. This gap is most pronounced in equity markets and pensions.

2. Less than half of all capital markets activity in the EU actually takes place in EU27 countries. In some sectors, such as trading and hedge funds, more than three quarters of all EU activity is conducted in the UK.

3. Capital markets in the EU27 are significantly less developed relative to GDP than in the EU as a whole and only half as developed as in the UK. In every sector in our sample except one (investment funds by domicile) UK capital markets are deeper than in the EU as a whole.

4. The value of bank lending to companies in the EU27 has fallen sharply since the financial crisis. The stock of outstanding bank lending has dropped by 10% in the EU27 since 2008 and the flow of new bank lending in the eurozone has decreased by nearly 40%. Companies in the EU27 are more dependent on bank lending than in the EU as a whole, and much more so than in the UK or US.

5. The range in the depth and development of capital markets between different countries in the EU27 is far wider than the gap with the UK or US. There are three clear groups of countries in terms of the depth of their capital markets.

6. Capital markets have increased in depth over the past few years in three quarters of the countries in the EU27, but on average capital markets are still the same depth as they were before the financial crisis. Over the past decade, corporate bond markets have effectively doubled in size relative to the GDP in the EU27, but equity markets have shrunk. Pools of capital – the starting point for deep and effective capital markets – have also grown significantly relative to GDP.

7. This change in depth translates into some very big numbers. There are roughly €2 trillion in additional pensions and insurance assets in the EU27 today than there would have been if they had remained at the same level relative to GDP as in 2006, and there are nearly €150bn a year in extra corporate bond issues.

8. Brexit could lead to a more balanced and even development of capital markets across the EU27. No single country dominates capital markets in the EU27 in the same way that the UK dominates activity in the EU as a whole.

9. There is a huge opportunity for the EU27 to develop its capital markets. If markets in the EU27 were as deep as in the EU as a whole relative to GDP, it could unlock roughly €2 trillion in pensions and insurance assets to invest in the EU27 economy, and could lead to more than €50bn a year in additional financing for companies.

10. The dependence of the EU27 economy on bank lending is mirrored by individual savers. One third of all household financial assets in the EU27 are held in cash and bank deposits, compared with just 24% in the UK and 11% in the US.

For more information on the report and the methodology behind it, please contact William Wright, managing director at New Financial, on 44 203 743 8269 or william.wright@newfinancial.eu

About the report:

The report analyses the depth of capital markets across the following 24 different metrics in all 28 EU member states:

- Pools of capital: pensions assets, insurance assets, household financial assets (excluding pensions, insurance and cash deposits)

- Market value: stockmarket, bond market, corporate bond market, securitisation market

- Assets under management: investment funds by domicile, assets under management by country

- Debt issuance: bank lending relative to corporate bonds, corporate bonds, investment grade bonds, high-yield bonds, syndicated loans, leveraged loans, securitisation

- Equity issuance: all equity issues, initial public offerings, secondary equity issues

- Corporate activity: all mergers and acquisitions, domestic M&A, private equity activity, venture capital activity

- Trading: equity trading volumes

This year we have improved and simplified our methodology. In each category we measured the value of activity as a percentage of GDP in each country on a three-year rolling basis from 2004 to 2015 to iron out the annual volatility in capital markets. To enable a comparison in depth between sectors we rebased these percentages to the EU average, with 100 representing the average depth across the EU in the three years to the end of 2014. The overall ranking is the average of these scores across all 24 metrics.

For example, the value of EU stockmarkets in the three years to 2014 was 65% of combined EU GDP. We rebased this 65% to 100, meaning that in any given period a country with a score of 50 has a stockmarket that is half as deep relative to GDP as the EU average in the three years to 2014, and one with a score of 200 is twice as deep.

About New Financial: 

New Financial is a think tank and forum launched in 2014 that makes the positive case for the vital role that capital markets play in driving growth and prosperity. We believe Europe needs bigger and better capital markets – and that this presents a huge opportunity for the industry and its customers to embrace change and rethink how capital markets work.

We work with market participants from different sectors across the industry – investors, issuers, banks, and policymakers – to help change the quality and direction of the debate on the future of capital markets through a managed programme of research and private events based around four main themes:

Unlocking capital markets

The main focus of New Financial’s work is how to make the positive case for bigger and better capital markets and how markets can be improved for the benefit of issuers and asset owners.

Rebuilding trust in capital markets

A starting point for making the positive case for capital markets is the need for market participants to work together to restore trust in the capital markets with all stakeholders.

Driving diversity

Diversity in its broadest form is an essential part of building a more sustainable and resilient business – and of changing culture and rebuilding trust in capital markets

Getting pay right

In financial markets, pay is about more than just the numbers: pay is an important barometer of how the industry sees itself in relations to customers, shareholders and society.