Michael Hintze, the founder of hedge fund CQS, has used his latest letter to investors to warn of the opposing nature of two of the biggest regulatory initiatives facing the markets: Basel III and Solvency II.
Hintze wrote that Basel III and Solvency II contain many aspects that are structurally opposed to one another. "Solvency II requires insurance companies to adopt a risk-based capital regime, but the consequences are that they will have to set aside more capital for longer duration and lower rated instruments, at a time when under Basel III banks need longer duration capital while their own rating are under pressure."
In his latest investor letter, Hintze outlined several other unintended consequences of regulation. He said that a combination of Basel III, the rise in banks’ own cost of capital and Dodd Frank’s Volcker rule has meant that the ability and willingness of banks to provide liquidity has decreased significantly and the cost of trading has gone up. He added: "The consequences are negative for financing of companies and include an increase in the cost of capital to businesses, a rise in the volatility of prices and an inability of markets to move toward rational prices".
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