FSR FINANCIAL STABILITY REVIEW APRIL 2015 FINANCING THE ECONOMY: NEW AVENUES FOR GROWTH 19 110–019 CONTENTS ARTICLES Introduction The financing of the economy in the post‑crisis period: challenges and risks for financial stability CHRISTIAN NOYER, Banque de France 7 The new framework for financing the economy Completing the single market in capital BENOÎT CŒURÉ, European Central Bank 15 What does the new face of international financial intermediation mean for emerging market economies? HYUN SONG SHIN AND PHILIP TURNER, Bank for International Settlements 25 Financing solutions to sustain the growth of SMEs and MTEs and lay the foundations for future competitiveness ARNAUD CAUDOUX AND JULIEN GEFFROY, Bpifrance 37 Reviving securitisation MIGUEL SEGOVIANO, BRADLEY JONES, PETER LINDNER AND JOHANNES BLANKENHEIM, International Monetary Fund 51 The role of banking systems in supporting growth Supporting sustainable growth: the role of safe and stable banking systems STEFAN INGVES, Sveriges Riksbank and Basel Committee on Banking Supervision 65 How a supplemental leverage ratio can improve financial stability, traditional lending and economic growth SHEILA C. BAIR, The Systemic Risk Council 75 Key initiatives to unlock bank lending to the European corporate sector PHILIPPE DE FONTAINE VIVE, European Investment Bank 81 The impact of the new regulatory paradigm on the role of banks in financing the economy MARIE‑LAURE BARUT, NATHALIE ROUILLÉ AND MARION SANCHEZ, Banque de France 89 The constraints faced by banks in financing the economy Impact of financial regulation on the long‑term financing of the economy by banks MICHEL PÉBEREAU, BNP Paribas 103 Global banks and the adoption of the new regulatory framework: effects on the financing of emerging markets and developing economies AGUSTíN CARSTENS, Banco de México 111 The opportunity cost of collateral pledged: derivatives market reform and bank lending GUILLAUME VUILLEMEY, Science Po and Banque de France 119 Financing the economy: new avenues for growth Banque de France • Financial Stability Review • No. 19 • April 2015 3 CONTENTS The contribution of insurance companies and asset managers for financing the economy Long‑term savings: the case of life insurance in France CHRISTIAN GOLLIER, Toulouse School of Economics 129 The long‑term financing of the economy in the new regulatory environment DENIS KESSLER, SCOR Group 137 The role of investors in promoting sustainable long‑term growth BARBARA NOVICK, BlackRock 147 Reallocating savings to investment – The new role of asset managers YVES PERRIER, Amundi 157 PUBLISHED ARTICLES 165 Financing the economy: new avenues for growth 4 Banque de France • Financial Stability Review • No. 19 • April 2015 Introduction The financing of the economy in the post‑crisis period: challenges and risks for financial stability CHRISTIAN NOYER Governor Banque de France he numerous changes that the financial and the implementation of the new standards, which system is currently undergoing are different have caused a number of inconsistencies. These in nature; some appear to be structural, while interactions have created new incentives and led Tothers are merely transitory. to the emergence of new forms of funding. While some of them may be a useful complement to bank Many of these changes stem first from the lessons lending, they also pose a risk to financial stability. learned by market participants themselves from the financial crisis: the financial crisis seems to have Indeed, the rise in bank intermediation costs and the prompted a very cautious attitude to risk‑taking increased regulatory burden placed on banks have among economic agents, in the same way as observed led to the emergence or development of alternative with previous crises;1 secured financing, backed sources of funding, notably direct market financing by collateral, is growing fast; lenders are granting – especially in Europe where banks have traditionally loans at a shorter maturity, all things being equal, played a dominant role in financing the economy. and generally speaking investors are demanding This is precisely why the European Commission increasingly greater transparency. recently launched its Capital Markets Union initiative. Other changes are the expected consequences of However, it is also being accompanied by a number regulations introduced in response to the crisis. of other potentially problematic trends, resulting in, The G20’s regulatory reform agenda covers a on the one hand, upward pressure on transaction number of areas addressing different components and issuance costs and, on the other, an increasing of the global financial system, including banking fragility of liquidity at least on certain market regulation (Basel III), the ongoing identification of segments: the withdrawal of some banks from their systemically important institutions (banks, insurers, traditional market‑making activities, which have market infrastructures and non‑bank, non‑insurance been made less viable by the combined effect of institutions), the treatment of over‑the‑counter regulatory constraints, the search for yield and derivatives, and the objective to transform shadow investor focus on new asset classes (exchange‑traded banking into a healthy source of market financing. funds – ETF, high‑yield, etc.); episodes of illiquidity This reform agenda has principally resulted in a in secondary markets, notably corporate debt rise in the cost of bank intermediation due to better markets; the rapid rise of other areas of activities, pricing of risk, increased incentives for the centralised such as asset management, high frequency trading clearing and standardisation of derivative products or speculative funds which are replacing banks as and a decline in the risk of default. the main providers of liquidity, but whose behaviour can be harmful or at best pro‑cyclical during episodes Finally, these two types of change have also of market turmoil, and the concentration of assets interacted to produce other consequences, stemming among a small number of players with the growing from differences across jurisdictions in the speed risk of herd behaviour. 1 See, for example, Arrondel (L.) and Masson (A.) (2011): L’épargnant dans un monde en crise : ce qui a changé, Paris, Éditions rue d’Ulm. Financing the economy: new avenues for growth Banque de France • Financial Stability Review • No. 19 • April 2015 7 The financing of the economy in the post-crisis period: challenges and risks for financial stability Christian Noyer I would now like to sum up the main challenges to reduce counterparty risk (adverse selection), and we need to address to ensure the smooth financing can limit moral hazard by monitoring the behaviour of the economy, and discuss their implications of of borrowing companies after they have made their these issues for financial stability. investment decisions. Nonetheless, this reliance on bank lending, which 1| NEW CHALLENGES TO THE FInanCING accounts for close to 65% of the financing provided to the economy in France and over 70% in the rest of OF THE ECONOMY continental Europe, can be a source of vulnerability for companies that are affected by the regulatory 1|1 Against the backdrop of a gradual constraints facing banks. but still uncertain economic recovery, ensuring the financing of the economy 1|3 The main challenge is to foster is a key priority for the authorities the development of a market financing as a complement to bank financing Eight years after the outbreak of the crisis, many economies still have not seen a return to their pre‑crisis levels of activity and employment. In France, for The ability of banks to finance the economy example, industrial production at the start of 2015 was is coming under strain, on the one hand due to around 18% lower than in early 2008 and the volume ongoing efforts to clean up bank balance sheets; of corporate investment was nearly 10% lower, while on the other, due to the gradual implementation of the number of unemployed had risen by close to new regulations from 2018 onwards – although the 1.5 million during this time. Prospects of recovery bulk of these has already been applied in advance remain extremely timid in the near term, like in as a result of competitive pressures and pressures the rest of Europe, particularly for investment. Yet from investors and regulators, and the calibration a recovery in investment is precisely what is needed of new bank solvency and liquidity ratios has if we are to rebuild production capacity. been revised to limit potential negative effects on corporate financing. It is therefore crucial that banks, and the rest of the financial system, have the capacity to finance As a result, the main challenge now faced by the economy’s investment needs, which are set to European economies, and even more by emerging increase as the recovery gets stronger. economies, is how to make the transition towards a more market‑based financing model. The process has already started, although the speed and extent of the 1|2 The financing of SMEs shift differs across countries and sectors. and of long‑term investment is a core concern During crisis, for example, companies countered their financing difficulties by turning increasingly to capital markets, raising funds via bond issues In continental Europe, the increased regulatory and, to a lesser extent, capital increases. This trend burden has proved particularly detrimental to the was particularly marked in France but really only financing of long‑term investment, in particular for concerned