Impact of New (and Old) Regulation

The European Treasurers’ Peer Groups’ discussions with the central banks’ management assist us in understanding how we must adjust for the future.

Here are some clues:

The window for change has disappeared with the improved economy, which opens up for less drama. Rigorous change basically does not make any political sense any longer and probably the far fetching regulation of the non regulated markets will therefore not happen. And I’m not sure that is a bad thing. It might even reduce to only fighting for global taxes on financial transactions and limiting bonus schemes. The former will definitely lead to higher costs of financing for consumers and corporates and I therefore suspect it will not happen. The latter is only populism and has no real impact.

It seems however likely that increased capital requirements will be implemented but slowly and not during present business cycle. We understand that capital requirements will be increased in periods of high economic activity and vice versa. This makes sense and could limit future bubbles.

There is no sign the central banks are paying any attention to the society outside the banking system. This is especially true in Europe where saving the banks means saving society from economic disasters. As us corporates know this is not true. We will unfortunately have to live with a financial regulation with main focus to avoid bank defaults (Basel II). This means that established trends will continue:

Banks continue exiting the market of balance sheet commitments to corporates and focus more on the private market. One of the cornerstones to avoid bank defaults in the Basel framework was making the banks less exposed to corporate risk introducing the credit markets as buffer and high capital requirements on corporate risk. Very little has been learnt from the crisis in this area and therefore the shift to arm’s-length from relationship banking and increased reliance on automated risk management will continue. The only major lessons learnt by central banks from the crisis is that banks and financial institutions will default despite of Basel II. Therefore they have implemented models to avoid another Lehman. That’s a good but not a sufficient improvement.

One area where the central banks do not take any responsibility is improving the global payment system. This could be an area where modern regulation could have provided substantial value for the non financial sector. The central banks expect the “markets” to improve payments infrastructure but it is obvious there are few incentives for the financial industry. Instead governments and central banks should assist by prohibiting float by law and breaching institutions would have to pay a severe “fine” to payer and payee. Then the incentives for change would be there. Actually I would expect that without this legislation payment systems would continue to be dysfunctional for many years to come. This would severely hurt the corporate sector having to continue raising liquidity to provide it to the financial sector, indeed an irrational setup.