The report, "How regulation can preserve the contribution of financial firms to economic growth in Europe", explains the essential role that financial firms play to promote economic growth, addresses the post-crisis regulatory reform agenda, and argues for a recommended direction for financial sector regulation that will help create sustainable long-term growth across Europe.
There is much at stake. Europe urgently needs to return to economic growth, not only to lessen the pressure of the sovereign debt crises but also to safeguard the long-term welfare of European populations. What specific policy measures are required is a matter of dispute among economists. Yet all would agree that a well-functioning financial sector is essential to the economic health of Europe and its citizens.
How financial firms promote economic growth
The first part of the paper describes the basic functions of banks and insurers, and explains their vital role in the real economy in intermediating between lenders and borrowers, absorbing risk and providing payment services.
Post-crisis regulatory reform
Financial sector regulation can promote long-term economic growth by reducing systemic risk and increasing investor and consumer confidence. But it can also hinder financial firms from playing their distinctive role in the economy. Over-cautious regulation can restrict the supply of credit to the real economy. And inconsistencies in the rules can create uneven playing fields, encouraging "regulatory arbitrage" whereby capital flows not to its economically best use but to uses (unintentionally) favoured by the rules.
In a globalised financial industry, unilaterally onerous regulation in one jurisdiction threatens to drive capital and financial operations to other jurisdictions. The EFR supports Europe's and the G20's policy goals, however regulators and policymakers must ensure that European financial firms continue to provide competitive products and services that are vital to citizens and businesses.
A framework for long-term growth
The crisis has shown the necessity of reforming the regulation of financial firms. But it is important that reforms to regulation help insurance companies and banks to play their vital role in promoting economic growth across Europe. EFR supports a regulatory reform agenda that:
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makes banks and financial firms independent of taxpayer support, including through effective resolution tools, thereby reducing moral hazard and distortions in risk pricing. In this context, EFR supports the move towards a banking Union with stronger role of the ECB;
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ensures a coordinated approach and level playing field across countries and sectors - most importantly, across banking and insurance (allowing for the structural differences in their assets and liabilities);
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encourages new funding models, new sources of investment and improves the financing of long-term projects. More long-term finance for viable projects, including in infrastructure and low-carbon technology, will boost growth, innovation and jobs in Europe. The securitisation markets also need to be revived and, to this end, The EFR was a co-founder of the Prime Collateralised Securities (PCS) initiative and continues to support this important project;
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explicitly trades-off systemic safety and economic growth. In the short-term, with financial risk-taking naturally subdued by the recession, this should make regulators err on the side of growth, while putting in place a framework for a long-term and stable expansion;
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provides clarity in the reform process as uncertainty stifles the ability of banks and insurers to invest in the real economy. The competitiveness of the European financial services industry also needs to be preserved vis-à-vis other parts of the world
The EFR represents Europe's major banks and insurers. It is committed to providing Europe with the stable but vibrant financial sector required for economic growth and to constructive engagement with policy-makers. The EFR is also a firm believer in a fully integrated internal market and the benefits this produces for the broader European economy, its citizens and businesses.
Press release
Report
© EFR - European Financial Services Round Table
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