The European Savings Banks Group welcomes the opportunity to make comments on the European Commission's Green Paper on the Long-Term Financing of the European Economy.
The ESBG agrees with the analysis made by the European Commission that – in some Member States - bank lending is decreasing, and that – where there is a supply side shortage - it creates a gap that needs to be filled. This gap, according to the European Commission, is the result of the crisis that made banks unable to lend at long maturities. The European Commission sees this change as irreversible and therefore encourages the entry of new players in the long-term financing activity.
The ESBG disagrees on the reasons of the funding gap and on the solutions brought forward. The ESBG does not agree on the reasons for the reduction in bank lending put forward by the Commission. The short-term reasons for this drop in current bank lending are obviously a result of the crisis. And in this respect the ESBG has first and foremost to mention demand-side effects: The economic uncertainty does not encourage investors to contribute towards the long-term financing of the European economy. Companies are refraining from investing because of low economic activity and a rather bleak outlook; and the reduction in the number of viable projects. On the supply side in the vast majority of cases the availability of funding is not problematic in this crisis. Generally speak-ing, there is no fundamental supply-side shortage of lending. The drop in the rating of Member States’ sovereign debts however, has forced banks to deleverage to compensate the loss of quality of their books.
But the long-term reasons for a diminution of a bank lending are independent from the crisis: new prudential rules will change the process of bank intermediation, and the increased competition of institutional investors which are forced to change their model because of the government’s inability to provide them with safe and remunerative sovereign instruments.
The goal of the Commission’s Green Paper is to encourage the competition from institutional inves-tors. It also paves the way for a shift from the European model, based on bank funding, to the US model, based on capital market funding. It is ESBG's understanding that it is not about filling a funding gap, but about changing the model.
This is not acceptable; the ESBG is convinced that this is not in the interest of the European economy as it is not adapted to it. This system does not allow for the protection of deposits and has demonstrated its flaws on the other side of the Atlantic.
The role of banks is to provide long-term and short-term financing, to handle and manage risk and to protect depositors through their capital thanks to a heavily regulated framework (solvency and prudential rules with CRD IV and banking supervision), a Deposit Guarantee Scheme and in the future the Recovery and Resolution Directive. Other types of financial intermediaries do not share in this risk management function, they are providing products and selling them to the customers, but they are not taking the risks for the transformation of deposits into long-term investments, like banks do, i.e. the customer is directly taking these risks although they may not be prepared to manage them.
The Green Paper’s approach of diversifying the system of financial intermediation will lead to an opaque and less stable financial market. As long-term financing is always a question of credit risk, it is dangerous to shift this function to the non-bank sector, which is regulated and organised differently from banks. It is of utmost importance for the ESBG to highlight that only banks are in the risk-taking business, non-bank institutions are only transferring the risk to their customers and limit their risks to market risks.
From a long-term perspective, despite several crises, banks have always had a stabilising function in the European Union and bore the burden in the economic downturn, absorbing a significant amount of losses. When going forward, it should be taken into account that their business of risk taking was very successful in the past because it was managed very strictly. As the ability of taking risks by banks is closely dependent on the quality of assets, the regulation should take care of this aspect and not merely focus on the quality of capital or liquidity.
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© ESBG
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