Banks may struggle to raise funds from insurers due to a conflict between Basel III rules for lenders and Solvency II regulation for insurers, said Prudential CEO, Tidjane Thiam.
Basel III’s liquidity rules mean European banks may need to raise as much as €2.3 trillion ($3.1 trillion) in long-term funding, New York-based McKinsey & Co said in 2010. Insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds under the European Union’s Solvency II rules, which makes them more expensive to hold.
“At a high level they want banks to have more capital and you know who owns the banks -- it’s us”, said Thiam, who leads the UK’s biggest insurer by market value. “Solvency II, which is our own solvency regime, says that we cannot invest in banks. I’ve made the point here to many regulators: How does that work?”
Basel III, due to be implemented in 2019, proposes requiring banks to hold enough cash or liquid assets to meet liabilities for a year. The aim is to wean banks off the short-term funding from other lenders that dried up during the crisis and sent Lehman Brothers Holdings Inc into bankruptcy. To meet this requirement, banks may have to sell long-dated bonds, which are currently bought by insurers.
Meanwhile, the EU’s Solvency II regulations, which may not come into force before 2016, make holding long-dated corporate bonds more costly. They may be prohibitively expensive for insurers, Thiam said.
To encourage better collaboration between regulators and insurers, the Bank of England, which will take over responsibility for financial regulation in the UK this year, is discussing an exchange of employees with the insurance industry, Thiam said.
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