De Larosière criticises US protectionism and EU Solvency II rules
Former IMF and Banque de France chief Jacques de Larosière says the introduction of a swath of new regulations in Europe may jeopardise the continent’s growth
De Larosière, who is president of European think-tank Eurofi, said unless regulators curb the most onerous aspects of new rules and policy-makers create better conditions for growth, real economic activity is likely to suffer – particularly in continental Europe, where three-quarters of credit intermediation is performed by banks rather than financial markets.
He particularly attacked the role of Solvency II rules on insurers, as well as new liquidity ratios contained in the Basel III framework.
In an article, The trade-off between bank regulation and economic growth, published in the latest edition of the Central Banking journal, de Larosière said the situation in Europe stood in stark contrast with that of the US, where financial markets play the largest role in credit intermediation. “Additional capital constraints weigh at least three times more, in economic terms, on European economies,” said de Larosière.
Moreover, the US “is still enjoying positive growth” and “its regulators are, in fact, ‘protecting’ their numerous banks”, he said – in particular, those that are financing the real economy. “On the other hand, Europe in recession is rushing to comply – ahead of schedule – with the fully-loaded Basel regulations. What an example of coordinated anti-cyclical policies!” he added.
De Larosière believes new bank long-term liquidity provisions will inevitably lead to a reduction in the maturity of bank lending. “The ‘re-matching’ principle of long-term assets by resources of the same duration would lead, if not deeply amended, to extreme consequences for economies that cannot shift in one fell swoop from a generally well-functioning traditional banking intermediation system to market finance,” he said.
The Frenchman also said the introduction of a net stable funding ratio (NSFR) – part of Basel III – will force a large number of European banks to finance their medium-to-long term loans by issuing bonds of the same duration. “This will lead European banks, especially in the periphery, to compete with states and corporations in a limited financial market,” de Larosière said. “This calls into question the fundamental and traditional role of transformation played by the banking system. It will also incite banks to shorten the maturity of their loans whatever the justified needs of their clients. Such a shortening of maturities will inevitably reduce the ability of the system to finance growth.”
De Larosière said another example of the unintended consequences of regulation can be found in Solvency II. “This, exclusively European initiative, deters insurance companies (which have always held long-term liabilities) from holding corporate stocks and pushes them into sovereign bonds,” said de Larosière. “However, these institutions have traditionally played an instrumental role in financing – and holding – equity, which is essential for the long-term financing of our economies. Something has to be done to restore that role.”
Attempting to provide a scale to the gravity of the situation of bank deleveraging in the European Union, de Larosière cited the IMF’s Global Financial Stability Report (GFSR) in October 2012. “Under the baseline scenario, a sample of 58 European banks is expected to reduce their assets by $2.8 trillion (7.3% of their assets) from the third quarter of 2011 to the fourth quarter of 2013. This does not bode well for future growth given the deepening recession that is developing in a large part of Europe,” he said.
The former head of the French central bank also criticised market participants – and regulators – for treating financial institutions as homogenous entities, either by region or by size. “It is time that markets and notably international official institutions carefully look at individual balance sheets and avoid regional generalisations as well, as simplistic and aggregate judgments on what are very different firms,” de Larosière said.
This article was first published on Risk