At the Paris Europlace event, which I attended last week along with 1,500 other delegates, the major concern underlying every discussion was that there is a risk that some of the new banking and insurance regulations currently being considered at the international level will have a negative impact on the economy.
So soon after the financial crisis, and in the middle of the European sovereign debt crisis, there was no direct criticism of Basel III and Solvency 2 but the point was made that French and German banks with their universal banking model had withstood the financial crisis better than some of their international competitors and that the French government had earned €2.7 billion from its banks’ support scheme enacted during the crisis.
The point was also made that at a time when European companies are relying more on the capital markets for their funding, it is important to encourage long term savings. European companies have traditionally relied on banking intermediation for 75% of their funding with only 25% coming from the capital markets; that proportion is reversed in the US and Europe is moving towards the US model. Yet, according to some participants, some measures included in Basel III and Solvency 2 have the effect of discouraging long term savings.
One such measure is the Liquidity Coverage Ratio included in Basel III which requires that banks maintain sufficient high quality liquid assets so that they can meet their liquidity needs for a period of 30 calendar days. It is argued that the measure will divert funds from corporate lending. Another issue is the Solvency Capital Requirement in the Solvency 2 Directive which may lead insurance companies to reduce their equity holdings.
Whereas Basel III is a set of measures that should eventually apply to every bank in the world, Solvency 2 is a European directive that will only apply to European insurance companies. There was, therefore, a concern that Europe is imposing rules on its insurance industry that will put it at a disadvantage internationally. Even in the case of Basel III, some were questioning the rational for imposing these new rules when the United States have not even implemented Basel 2.5 which sets out capital requirements for trading books.
For some participants to the conference, a global assessment of the impact of all these measures taken together has clearly not been made. They believe, in particular, that no one seems to have taken into consideration that most of these measures will force financial institutions to tap the bond market at a time when both governments and corporatess have each increased their access to that source of funding by over 60%.
The new French Finance Minister, François Baroin, did not directly answer these concerns in what was his first public address since his appointment in replacement of Christine Lagarde. However, he did acknowledge that the transition period to the new rules may not have been properly planned, but he insisted that regulatory reform was necessary and that it would be one of France’s priorities during its presidency of the G20.
Overall, it was a very interesting conference during which many other very topical issues were discussed, such as the impact of oil prices on asset management, the operational issues linked to Euro denominated funding and, the commodities markets. It was also a good opportunity to meet regulators and market participants.