Debt markets move overshadows banking union Ask anyone working in Europe's corporate bond markets about "banking union" - the hottest topic in Brussels and Frankfurt - and you are likely to get a blank stare. They are too busy making money out of the current surge in issuance to fret about still-fuzzy plans to centralise bank supervision. Traditionally, Europe's companies have relied far more heavily than US rivals on borrowing from banks, rather than from markets. But with banks hit by a toxic combination of higher funding costs - linked to the creditworthiness of their governments - regulatory overload and poor past lending, that balance has shifted. As banks have de-levered, investment-grade corporate bond issuance has surged in recent months: September's figures for Spain and Italy are on track to be the best for any month since 2009. Demand has been lifted by investors seeking a decent yield and supply by the attractively-low interest rates investors are accepting. In crisis-hit eurozone "periphery" countries strong companies can borrow from capital markets at significantly lower costs than their own banks. As a result, the corporate debt market teams at global investment banks are on a roll, unlike their colleagues in other departments. Dreams of a European market to rival the depth and liquidity of the US corporate bond market are returning. Who needs traditional lending banks - let alone a banking union? Such thinking helps explain some of the indifference towards banking union: a common view in the UK seems to be that the status quo would do just fine. But it is of course wishful thinking. The euro-denominated market still pales in transatlantic comparisons. Outstanding debt issued by companies (excluding banks) since the launch of the euro in 1999 is only about a third of the US total, according to Dealogic data. The recent feast follows past years of famine. Many recent deals have been opportunistic - companies spotting a chance to pre-finance at exceptionally low interest rates. Turnover in secondary markets is thin, as is speculative-grade issuance. Banking bastions, meanwhile, remain strong. It is mostly large companies tapping markets. Germany, rich in conservative Mittelstand industrial businesses, has been under-represented in the latest surge, accounting for only 20 per cent of euro corporate bond issuance so far this year. Even a modest shift in European capitalism away from bank dependency will require overcoming a number of headwinds. Despite the single currency, eurozone markets have retained distinct national characteristics. The fact that since 1999 asset bubbles have grown and then burst in some member countries but not others has underlined their heterogeneity. Differences remain, in legal frameworks and the interpretation of supposedly-common rules and regulations. Unsurprisingly in the current crisis, corporate bond investors think along country lines. As such, the fates of banks and capital markets have become intertwined. Banks need capital markets to provide finance, lay off risks and provide a full range of financing services. But the reverse is also true: capital markets need efficient, solid banks to supply clients, infrastructure and - crucially - faith in Europe as a market. Weaknesses in the continent's financial system were highlighted in a background paper prepared for a Brussels conference hosted on Tuesday by the Association for Financial Markets in Europe, a lobby group. Its interest is in advancing Europe's capital markets, but it expressed concern about their ability to cope. As in the US, the European corporate sector faces a "wall" of financing requirements in coming years. Standard & Poor's has put eurozone and UK commercial refinancing needs (including banks) between this year and 2016 at $8.6tn, with likely new money requirements at about $2tn. With banks unable to step into the breach, and European capital markets under-developed, issuance on the required scale "could well prove to be a challenge," the AFME noted. The answer is that Europe's capital markets would be best served by the same things as banks: measures to boost economic integration and confidence in Europe's monetary union. That is where repairing the European banking system and building a banking union come in. Common bank supervision will help break the link between banks and individual sovereigns, removing national barriers that deter debt market investors. Progress may be slow. It is unclear yet if the European Central Bank will win responsibility for overseeing all eurozone banks, or just the largest. Germany has prevented moves towards a single deposit guarantee scheme, widely regarded as essential for an effective banking union. But capital markets, including the City of London, have an interest in ensuring plans for banking union are workable, and not ignored.