Following the initial reactions of regulators to protect market stability and dial down risk, we are seeing several points suggesting that the tide is turning: maintaining market liquidity is being looked at more kindly than in the last few years. In particular, we note European suggestions that securitization is really alright and that even Shadow Banking might not be so bad after all.
The first point comes from Andrew Haldane at the Bank of England, who wants to support securitization as a means of boosting small business activity. According to the Financial Times, Haldane said “In a world where we are squeezing risk out of the banking system we would want a simple, safe, vibrant set of channels for non-bank financing to emerge and securitisation is one of those. We are talking about simple and safe structures, rather than complex and shadowy ones.” In other words, keep the ABCPs at home, just stick to the easy stuff and we should be okay.
We like what we’ve seen from Andrew Haldane. He was among the first regulators to argue for a less-is-more approach in financial regulation coming out of Basel III (see “An excellent argument for reducing Basel capital rules from a Bank of England paper” for our write-up). He also seems to be voice of reason in an environment that can invite heady rhetoric. Let’s see if he can sway other regulators to his argument.
The next observation comes from Patrick Pearson, Head of Financial Markets Infrastructure in the European Commission’s Internal Market Directorate General. This makes him a point person on financial regulation and a direct report to Michel Barnier, European Commissioner for Internal Market and Services. According to Reuters, Pearson told the UK House of Lords economics committee that “The priority at this point is transparency, transparency, transparency. Regulators are quite aware not to squeeze out an important source of liquidity.”
Pearson’s comments were a welcome change of tone as compared to the (in our view) aggressive press release on Shadow Banking issued by the Internal Market and Services Directorate in September 2013. That release talked about transparency but also seemed to take a swipe at every component of Shadow Banking in turn. Perhaps this is one man’s view and a passing fancy, but we would rather have regulators talking about transparency, which we support, than introducing new regulations without a thorough evaluation of the consequences.
The FT also reported yesterday that the EU’s Financial Transactions Tax is now facing enough backlash that sovereign and public debt may now be excluded entirely, and even repo might finally get a break. The story is here.
Even the Volcker Rule gave a punt to repo and securities lending, recognizing that these functions provide important market liquidity. We covered the main issues yesterday in this post.
While we would not say that all is rosy and let leverage reign supreme, there does seem to a general easing of regulatory assessments towards Shadow Banking, in particular securities transactions that improve market liquidity. We think this will be the main trend going forward for the next year or two.