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It seems to me that central banks and governments around the world have been trying to kick start the economy that for some time and we have got into a whole new world of extreme use of monetary policy tools. This has done some saving of situations, but the transmission mechanisms are now looking about as effective as pushing on a piece of string; or if that is too harsh, certainly unpredictable in the speed of delivery. In UK and US it all seemed too slow, then both US and UK found jobs recovery suddenly being faster than Federal Reserve and Bank of England forward guidance had expected. Meanwhile the European Central Bank has proclaimed for a long time that monetary policy is not transmitting to the periphery and been urging return to a safe form of securitisation.
Putting both banking and the Euro on a stable footing is the foundation on which anything else is to be built; we could not go forward with holes. We just have to work around the situation where we can. So that means having targets, and the two targets frequently chosen, for obvious reasons, are SMEs and long term investing. Funding for business comes through banks or capital markets. In many instances capital markets has also meant back through the banks again.
So we face the conundrum that we are increasing, trebling, capital on banks at the same time as wanting them to lend. The European Parliament has stayed mindful of the real economy in its amendments to legislation, making significant changes to target SMEs, trade and growth and reduce the impact of derivatives legislation on non-financial corporates.
While the last five years has put regulation for stability first, the ongoing growth crisis and completion of most of the G20 based financial services legislation has finally allowed growth back on the agenda. Indeed it SHOULD, no MUST, be the central theme of the next EU mandate: citizens want jobs and a return to prosperity. Both the European Parliament and the Commission have put forward reports on long term financing ranging over topics from crowd funding and SME credit scoring to taxation and accounting. Long term financing in banks is to be the subject of reports and, it is promised, sensitive treatment in the delegated act rules on liquidity coverage ratios and calibration of the net stable funding ratio. The European Parliament has already been at the forefront of pushing greater diversity of liquid instruments - and in my book that means diversity of holdings as well as diversity of instruments.
Parliament fought hard for better SME growth market terms in MiFID II, also incidentally in the Central Securities Depositories regulation. In MiFID II we doubled the median market cap threshold to €200 million, and the delegated act details for SME growth markets will minimise administrative burdens. Guidance will be forthcoming for national promotional banks and development banks on co-investing with EU budget funds. This follows on from a lot of work with the European Investment Bank and European Investment Fund, much of which is delivered to locally based projects, including via councils in the UK.
Work is ongoing on how to define high quality securitisation - and while I am no fan of complex securitisations or trying to sneak around retention requirements, it is a pity most of the 5 years since we wrecked securitisation has been taken up by realising it was not all bad.
… So, there are legislative and non-legislative moves to encourage growth, but they will take time to have an effect. That is why the steps that the European Parliament took to assuage some of the regulatory burdens in the recent financial services legislation are all the more important in the intervening time.
One of the key things that should be done now is to look at the greater interconnectedness and correlation that regulation has created. For example the way bail-in directly connects banks and those funds holding bank bonds and equity. Maybe we need to use large exposure regimes a lot more, but I am a little fearful that that it might be impossible to set them all low enough. Then we come to real shadow banking. We must limit use of that term to those leveraged and maturity-transforming systems that are vulnerable to runs and generate contagion risk.