Regulation is pushing in the wrong direction
Far from tackling the problems that led to the global financial meltdown, new regulation is steering the banking sector towards yet another crisis.
The massive increase in bank regulation since the global financial crisis was always going to have some perverse effects. It now seems that while sovereign and mortgage lending are powering ahead, corporate lending has taken a nosedive, especially lending to small and medium-sized enterprises (SMEs) – the very sector that governments most want to encourage.
A recent report from ratings agency Fitch, called 'The impact of macro-prudential reforms', makes for interesting reading. A study of 16 European G-SIBs (global systemically important banks) discovered that total lending had not reduced a great deal but that the allocation of credit has changed significantly. Exposures to residential mortgages and sovereigns were up, while exposures to financial institutions, securitisations (many of which would be securitisations of SME assets) and corporates were all down. Corporate lending was down 9% between 2010 and 2012.
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Not only is this the reverse of what economic policy-makers would like, it also flies in the face of the crisis reality: that sovereign and mortgage risk have been at the forefront of banks’ troubles, not corporate and SME lending.
How on earth did this happen? The big problem is risk weights and especially the higher capital charges for securitisations and longer dated lending. It has become too capital-intensive for banks to lend long term to projects such as infrastructure – the very ventures that have key economic benefits – so they have shifted more towards residential mortgages – the very thing that accentuates boom and bust.
In some cases, corporates have responded to this by accessing the bond markets directly, but this option is only available to the larger players, not to SMEs. In other cases, insurance companies are filling the gap by lending directly to companies. Are we really saying that insurers are better at assessing corporate risk than banks?
Even for insurance companies, the long-term assets it would make sense for them to hold – given they mostly have long-term liabilities – are tricky under Solvency II. So, the net result of regulatory efforts in the financial sector is to discourage long-term lending for growth and investment and encourage more flows to sovereigns and residential property. Not a great result. Perhaps we can get things right after the next crisis.
Brian Caplen is the editor of The Banker.
