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14 December 2010

Financial News: Regulation and uncertainty are ‘killing’ recovery


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Senior executives across the European investment banking and asset management industry have warned that the barrage of poorly thought-through regulatory reform is causing uncertainty that is stifling the nascent economic recovery in Europe.


 Bankers and fund managers have told Financial News that the high volume and slow pace of regulatory reform, coupled with the uncertainty of outcome over the past two years is reducing levels of investment and lending at a time when European companies need them most, as crises continue to engulf eurozone countries. They are urging policymakers to work together with greater speed to avoid the possibility of the second leg of a double-dip recession.
Jerome Booth, head of research at Ashmore Investment Management, a specialist emerging markets-focused investment manager, said: “Continental political leaders appear unfocused, slow and myopic in a rapidly worsening political environment. Over two years after Lehman Brothers’ collapse we still have not finished the crisis management job of recapitalising banks either side of the Atlantic.” 
The sheer volume of regulatory change has caused uncertainty, disjointed implementation and a reluctance to take risks, according to Selwyn Blair-Ford, head of global regulatory policy at risk management consultancy FRSGlobal. He said: “This feeling of powerlessness means the industry isn’t concentrating on exploring investments or boosting the wider economy, instead they’re trying to protect themselves from the next regulatory or political hit. Overall, as understandable as it is, it isn’t healthy.”
Many executives worry that an unlevel playing field is developing between firms that compete for the same business under different regulatory structures, between bailed out and non-bailed out banks and between companies based in countries with tight regulatory regimes and those that are not. 
Andreas Utermann, global chief investment officer at RCM, part of Allianz Global Investors, believes Europe is likely to lose significant business over the coming years because its policymakers are seeking the moral high ground on hedge funds, shareholder governance and compensation practices in the hope the Americas and Asia will follow.
Many of the executives interviewed by Financial News expressed concern that regulation had failed to address the problems that policymakers hoped they would solve and – in some cases – are making matters worse. HSBC’s Assaf argued that the impact of the new regulations on post trade and clearing houses, which might result in securities cleared through central clearing houses, has the potential to create huge systemic risk. 
Financial executives predicted that new capital adequacy rules – such as those enshrined by Basel III – could also have negative unintended consequences. While John Dickson, head of investment consultancy Hymans Robertson, argues the new rules could have a knock-on effect on banks’ propensity to lend. He said: “Cash-strapped businesses will therefore continue to struggle to get the credit they need and this may lead to further firm closures and redundancies.”
Bob Parker, a senior adviser at Credit Suisse Asset Management, said: “As regulators demand higher capital ratios, smaller balance sheets and lower leverage ratios, inevitably bank lending standards will tighten and the lower availability of credit is a constraint on economic recovery.”




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