At the 2017 Frankfurt Finance Summit, titled Europe Reloaded – Challenges for the Financial Sector, the transformation of long-term financing will be explored in the third panel discussion. Long-term financing is a crucial linkage between the financial and real economy, ensuring growth and stability. Furthermore, long-term financing plays an important role in society, facilitating the funds needed to undertake large infrastructure projects. Providing financing is one of banks’ natural functions. Regulatory requirements following the financial crisis have restricted banks’ ability, and to some extent, willingness to lend. Banks are increasingly unable to meet the rising demand for credit, which has led to non-bank actors becoming providers of long-term capital. However, these are not subject to the same regulations as banks, which creates new risks to financial stability.
Fueling growth and innovation
Long-term financing is a key factor for ensuring sustainable growth in the real economy. As companies expand and invest in new technology, financing is critical. Providing credit to businesses facilitates investment in expansion, new equipment and technology, R&D and personnel. This investment fuels real economic growth and helps European businesses remain competitive in the global arena. Long-term financing also helps banks and businesses look towards the future and increases stability. It allows banks to plan for the long term and to organize their liquidity management, which means they can reduce their vulnerability to short-term changes in capital markets and level out fluctuations in interest rates.
A bridge to the future
Much like a business’s financing requirements for investing in new technology and equipment, governments at every level require long-term financing for large infrastructure projects. Germany’s Ministry of Transport estimates that an investment of 7.2 billion Euros will be needed each year to maintain just the federal republic’s roads, railways and waterways. An expanding digital infrastructure challenges municipalities – in today’s digital economy, subpar connectivity is not an option.
The transition away from fossil fuels and atomic energy towards renewable sources of energy requires an enormous long term investment. In 2016, Germany spent 25 billion Euros on renewable energy. A byproduct of this investment has been the creation of hundreds of thousands of jobs, besides the obvious sustainable sources of energy to power its cities and industry. A growing economy demands a strong infrastructure, which is one factor that contributes to Germany’s attractiveness as a business location. Long-term investment in these infrastructure projects protects an economy’s future capacity for growth.
Finding the delicate regulatory balance
After the financial crisis, regulations have introduced much needed safeguards in the banking sector, but some argue that the demands of Basel III and Solvency II serve to disincentivize banks from long-term lending activities. Since margins are lower in long-term lending, incentives for carrying this risk on their balances sheets are very low. The European Commission addressed this issue in its 2013 Green Paper, encouraging other financial intermediaries to participate in long-term financing.
However, this is not a perfect scenario because these nontraditional intermediaries are not subject to the same regulations as banks. This creates an unlevel playing field and creates new risks for the economy. It is difficult to evaluate the health of the shadow banking sector. Stabilizing the banking sector through regulation will not augment overall stability if less regulated actors create new risks. The challenge facing regulators, governments and the financial sector is to find a balance that allows the free flow of credit into the economy while protecting tax payers from potential bail out scenarios.
At the 2017 Frankfurt Finance Summit, Jens Tolckmitt, CEO of the Association of German Pfandbrief Banks, will chair the panel The Transformation of Long-Term Financing, exploring how the financial sector, regulators and governments can address these challenges on the horizon. Joining Tolckmitt on the panel will be Wolfgang Kirsch, CEO DZ Bank, Michael Rüdiger, CEO DekaBank, and Roland Boekhout, Chairman of the Management Board, ING-DiBa. More information about the Frankfurt Finance Summit on April 26, 2017 can be found here.