latest uncertainty over a Greek referendum to agree debt writedowns demonstrates, now more than ever, that reliance needs to shift from banks to the securities market for the risk capital needed to fund future economic growth.
The G20, which meets today, therefore needs to take steps to revive risk capital markets to support growth, especially, but not only, in the developed economies. Whether or not there is significant shrinkage in bank assets, lessening dependence on banks for credit provision must be a priority, as banks rethink their business models as a result of new regulation. Such moves will also support systemic diversification and stability.
G20 policymakers need to work out how to incentivise the asset management and insurance industries to invest for the long-term in risk-bearing equity and in bonds to finance companies. Bank resolution mechanisms have already shifted the burden of the banking system from the taxpayer to the pension fund; it is time to transfer some of the returns as well. Cash balances at large corporations and retirement savings looking for returns to sustain future consumption need outlets for productive, profitable investment.
In this process, it is important to distinguish better between leveraged instruments at the heart of the financial crisis and classical debt and equity markets. The G20 has got to keep its eye on the prize of how good regulation can support growth, through better transparency in reporting on and enforcement against market abuse. The G20 needs to make the positive case with the public for well-regulated securities markets.
But regulators are currently closing off many of the obvious routes to market, notably securitisation. Only last week the Financial Stability Board (essentially the G20’s secretariat) published its piece on the growth and control of shadow banking. Setting up rules that inhibit bank lending, and then suggesting that having business done outside of the regulated banking sector is also very bad, is inconsistent reasoning at best.
Another major challenge is that well-functioning securities markets need liquidity and market makers; proposed rules make it very expensive for regulated banks to make liquid markets in securities. This week’s bankruptcy of MF Global notwithstanding, this implies that non-bank market-makers may again become more important.
What are the options? No doubt there are others, but key proposals should include: a cleaner, more standardised securitisation market for more traditional products, including packages of small business loans; actually encouraging non-bank underwriting and market making in a way that improves liquidity in the markets instead of concentrating it in the hands of a few large institutions, and being very careful that insurance regulation (notably Solvency II) doesn’t price insurers out of the long-term debt and equity holding business. Let’s hope the G20’s crowded agenda sees real progress on pro-growth measures for securities markets.
Barbara Ridpath is the chief executive of the International Centre for Financial Regulation.