The financial crisis has taught regulators to make the banking system safer. As a result, banks are being pushed out of riskier areas of activity and are required to hold more capital. Britain is discussing details of reforms aiming at imposing losses on bank bond holders as opposed to taxpayers. This means that many borrowers can no longer rely on the banks. The new rules however, are forcing lenders to be pickier, as it will be more expensive to fund assets due to higher capital charges and increased risk responsibilities.
Since, the capital markets are not for every borrower, doors open to other providers of non-bank finance. “This year is likely to be the first in which non-financial firms in Europe will have issued more debt than financial ones”. However, the idea that more funding activity will pass from banks to non-banks makes many people uncomfortable as systemic risks can build up outside the formal banking sector.
Nevertheless, insurers and pension funds for example will benefit from non-bank finance. Their long-term liabilities make them perfect candidates to invest in longer-term assets. Therefore the establishment of a good sort of non-bank finance should be the focus of European regulators. There is a strong case for allowing UCITS investment funds to be able to hold loans. In addition, resolving the uncertainty over new capital rules for European insurers (Solvency 2) would for example encourage investment in infrastructure.
Read the full article here: (Source: The Economist)