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Meeting With A Credit Agency July 13, 2011

Posted by Ishmael Chibvuri in Latest Articles!!!.
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At one of the peer group events we met up with a Credit Rating Agency (CRA) to get their views on how banking business models will change as a consequence of new regulation and capital requirements. Some of the conclusions:

  • Proprietary trading will become expensive and is shredded à lower liquidity in markets
  • OTC will be very expensive and plain vanilla/exchange traded instruments cheaper
  • Fee based banking requires very little capital
  • Banks will be incentivized to lend short term

This in turn will lead to:

  • We will probably not have any global banks providing a full product portfolio
  • For the SME sector, well they can forget bank funding with reasonable collateral requirements

Basically the regulators want to further decrease bank lending to the corporate sector. Previously the venture capitalists and the hedge funds took on that risk (read more here). But who will assume the lending responsibility now? Or shall the corporate sector expect not having sufficient cash to build and grow?

It is definitely a problem that the bureaucrats and central bankers are creating the rules for the financial market. Many of them are hugely risk avert and believe that decreased risk in the banking sector will bring good to society. But who will bear the risk of funding corporates and SME? The basic problem is probably that most bureaucrats and politicians have no clue how welfare and societal value is created. It is in the corporate sector, stupid!

We also need to consider that the high taxation in Europe drains the corporates and SME on cash and that cash has to be replaced. A natural consequence of the reduced lending must therefore be to lower cost when employing by reducing taxes. Probably that is the way forward.

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