Policymakers and financial actors in Europe have been at loggerheads about pending regulations to ensure that a financial crisis of this magnitude does not happen again and that taxpayers do not bear the costs. But regulation must be careful not to disconnect Europe’s nascent recovery from sources of credit, BusinessEurope’s chief economist Marc Stocker told EURACTIV in an interview.
Marc Stocker is chief economist at BusinessEurope, the EU employers’ organisation.
He was speaking to EURACTIV’s Claire Davenport.
BusinessEurope and other actors in financial services are stressing the need for ‘proportionate regulation’. How can we strike a balance between eliminating the factors that caused this crisis and ensuring that banks have enough room for manoeuvre to remain competitive?
We define proportionate regulation by measuring the impact it has on the economy. We have to be mindful of the impact regulation may have on companies’ access to finance.
There are a large number of initiatives on the table, such as Basel II, to increase capital on banks’ balance sheets. But what we lack currently is a total impact assessment. We really need an impact assessment of not only individual proposals but of the combined effect of all proposals on capital markets and on companies’ access to finance.
So higher capital in banks is a bad idea?
No, but all these capital requirements will have the net effect of reducing a bank’s capacity to lend. We need to ensure that regulation is compatible with the supply of credit to the economy.
In Europe especially the main source of external financing is bank lending. Financial activity is funded by two-thirds bank lending and one third capital markets. In the US it’s the opposite.
So the notion of creating a level playing field between banks on a global scale would put Europe at a disadvantage to the US?
There will be a disproportionate effect on the European corporate sector if we don’t have proportionate regulation and go too far without being mindful of the impact on the supply of credit. That doesn’t mean there will only be an impact on the competitiveness of banks. There will be a greater impact on companies, on non-financial companies, and we are very concerned about this.
At a time of very substantial restructuring in industry and in the wider economy, there is usually the emergence of new companies and these new companies need support to drive growth. We also need to develop capital markets because these will increasingly become an alternative to lending.
Also historically the financing of small and medium enterprises in Europe has been very difficult as the venture capital markets are underdeveloped in the region. It is much more developed in the US. Venture capital is a source of innovation and it will improve our capacity to move to a greener economy.
So what is the solution? Is there a middle ground between high capital requirements and other means of getting stable credit?
High capital requirements will be needed but when we decide how far we go, we have to measure the impact so we can meet the financing needs of the corporate sector.
The bond market has been extremely dynamic and has played a buffer role in the crisis. Larger companies have issued a lot of corporate debt on the corporate bond market, because there were no alternative means of financing for them. But SMEs are not able to do that. We will have to find equity sources of financing for SMEs, otherwise we will suffer much weaker growth.
The EIB has done a lot of good work for SMEs but beyond that there is a lack of European initiative. France recently unveiled an ambitious programme for building up equity finances for SMEs. So perhaps we can learn from that.
The notion of sharing the burden of future bank bailouts was flagged by Europe’s major financial players and is evolving as a kind of panacea to future crises. Will it ever work?
The big challenge ahead is how we find a solution to burden sharing. This was not addressed in the de Larosiere report and it was not part of the Commission’s proposal, probably because it is the most difficult part.
We must find a way of reducing the likelihood of large public interventions. We need contingency plans both at a national level and at a cross-border level which includes burden-sharing and sharing of information at the right time.
Regulators also need contingency plans so they can deal with crises, unwinding some parts of banks and keeping others. And if there is a need for the resolution of a cross-border bank, we need criteria for burden-sharing. It’s not easy, it will be difficult in practice, but if there is another crisis of this magnitude, the need for state intervention must be less.
Previously you have called for better enforcement of EU regulation. Now we have new supervisory committees intended to send out risk warnings and coordinate activity between national regulators. Do you think this is an improvement?
It is, yes. It is very important that we have a warning system issued by a credible body. Clearly it has a much better architecture. The European Systemic Risk Board (ESRB) is something that does not exist yet anywhere and will allow us to have a very broad assessment of systemic risks, something where Europe now is a leading force. The US is not considering going that far.
But isn’t this also a question of regulating people’s behaviour? Surely the crisis has taught us that we need checks and balances in place to ensure that the governors of Europe’s central banks sitting on the ESRB don’t engage in protectionist decision-making.
For the ESRB I think the danger of that is limited. For the second committee, the European System of Financial Supervisors (ESFS) for micro-prudential supervision, that risk does exist. In the EU, it has always been a challenge to make sure that information is flowing at the right time, to make sure there is collaboration.
Which stance does BusinessEurope take on burden-sharing? Does fiscal sovereignty outweigh the greater good for Europe?
We don’t take the ideological view. Fiscal sovereignty is very important. Tax authorities are at a national level. So when you engage taxpayers’ money, it has to be a national decision. So we need to define the criteria for a collective rescue. It doesn’t mean we have to say who will bear the big costs and who will bear the smaller costs but we do need technical criteria. What is most important at the time of a crisis is that regulators can talk to each other immediately.