Why Brussels red tape is threatening our credit market
When markets hit turbulent times, we naturally look to regulators to provide stability and to restore confidence.
Good regulation can be a real strength – I believe that the UK’s world-class regulatory regime contributes enormously to London’s ongoing success. The best regulation comes about through dialogue and consultation with practitioners.
This is why last week we published research into the European Wholesale Financial Services industry. We flag up possible dangers of the proposed amendment to the Capital Requirements Directive, which would only allow EU-regulated firms to hold securitised assets if the originators of debt hold at least 10 per cent of it on their books.
This could prove damaging to the competitiveness of Europe’s debt markets and that is why I am anxious to have a sensible discussion with the European Commission about their proposals. Unfortunately, there hasn’t been much opportunity yet: the Commission has not carried out a full impact assessment and has not given a reasonable window of time for consultation. Despite the potentially serious impact of the change, it has been introduced as a mere “technical amendment.”
Hit to growth
I can understand that the Commission may want to be seen to act quickly against complex products such as CDOs (collateralised debt obligations), which are widely blamed for the US sub-prime mortgage debacle. But that is no reason to shortcut the consultation processes. Our research shows that McCreevy’s proposal could cut gross value added (GVA) growth in European financial services by 3.5 per cent by 2009 and 5.3 per cent by 2012.
This proposal – to regulate all credit risk transfer products – is flawed. To begin with, crisis-driven over-regulation is not functional. McCreevy does not need to forbid investors from buying complex repackaged debt which they do not understand. They have lost enough money on CDOs already – only transparent products will sell now. The role of regulation is not to outlaw loss: healthy markets must go up as well as down. Instead, regulation should create transparent, consistent principles and incentives for the market.
Missing the point
The Commission’s proposals aim to make European markets less risky. This misses the point: finance is a global industry and Europe only has financial markets because it is an attractive place to do business. This proposal would simply drive the securitisation industry back to the US, where neither the European Commission nor the domestic regulators can touch it.
The result would be higher interest rates; we should be looking at ways to increase the availability of credit on European markets, not reduce it.
European financial markets face difficult times. The Commission can be part of the solution by providing world-class regulation to attract global business. Let us hope it does not decide to become part of the problem instead.
Stuart Fraser is chairman of the City’s policy committee