The regulatory approach governing the financial system lacks coherent design and is disabling the flow of credit necessary to fuel economic growth, according to research published by multinational law firm Allen & Overy.
‘The Future of Credit’ research, commissioned in anticipation of the Financial Stability Board's (FSB) report on strengthening the oversight and regulation of alternative providers of credit, maps out the impact of regulation on the provision of credit globally, highlighting the confusion and uncertainty the ever increasing regulatory burden is creating.
With Basel III, among others, already affecting traditional bank lending, the FSB's proposed policy framework raises serious questions about whether non-bank credit intermediation will be able to fill the funding gap left by banks. This is especially troubling when the FSB's own statistics show that banks are the only institutions to have increased their share of financial assets in the past five years – up $26.6 trillion since 2007 – but lending levels remain constrained.
Key findings from the ‘Future of Credit’ study include:
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Opportunities for investment funds: in most of Europe there is greater scope for lightly regulated and unregulated investment funds to be able to provide credit. But questions remain over whether the FSB's proposals mean this will be a short-term trend before the regulatory tap turns off the flow of much needed credit from this sector. They are also unlikely to be able to bridge the funding gap on their own and provide only part of any comprehensive solution;
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Time to realise the potential of insurance companies: Despite the uncertainty that still surrounds Europe’s Solvency II proposals, there is still great untapped potential in the insurance market. The question remains over whether regulators will promote them as a source of alternative funding and in what quantities. But the neutral regulatory outlook could be seen as positive given their relative competitive position against other market participants;
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Scope for regulators to liberalise European regulated funds (UCITs): Europe's regulated funds (UCITs) are a clear source of funding in the bond and covered bond markets but there is an opportunity for regulators to liberalise these structures to enable them to take a broader role in the credit markets.
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Banks remain the bedrock: It is clear that banks face the greatest pressure from regulators of any participants in the market. The knock-on effects of this are already apparent. But despite all the changes banks will remain the pivotal players in structuring large, complex financial transactions, where multiple pools of capital need to be accessed.
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