FINANCING THE REAL ECONOMY IN THE CAPITAL MARKETS UNION ERA – RECOMMENDATIONS FOR POLICY ACTION

1 Executive Summary
This report deals with the significance of the Capital Markets Union (CMU) for corporate finance. It begins by evaluating the status quo with regard to capital market-oriented and bank-based corporate finance in Germany. The subject matter and background of the CMU are then illuminated and the CMU is subjected to a qualitative analysis. The last section of the assessment features recommendations for action derived from the analysis.
The main results of the empirical section can be summarized as follows:
(1) There is a noticeable trend towards greater equity capital financing in Germany. Calculated as a portion of their total balance sheet, the equity ratio of German companies has risen approximately ten percentage points over the last 15 years. This trend is even more pronounced for SMEs than for large companies.
(2) The importance of bank credit and provisions for pensions has concurrently declined. The capital market-based share of financing has indeed risen; however, this increase has been restricted to capital market-oriented companies. For SMEs bank loans remain the primary source of external financing.
(3) German companies are not as unique as commonly claimed. A sample of capital market-oriented companies in Germany analyzed by us demonstrates that during the 2002-2014 period bank loans amounted on average to nearly 8% of their balance sheets. This ratio is similar to those prevailing in countries with capital market-based corporate financing. A look at German SMEs, however, reveals that bank loans amount to between 27% and 31% of their balance sheets. This is thus somewhat higher than the rates – which range between 17% and 25% - in France, Spain and Italy. This means that bank-based financing is of great importance to SMEs in all of these countries.
(4) An examination of the aggregate EU economy demonstrates... Read more