Regulating the asset management industry proportionally will help create growth and jobs
Seven years after the financial crisis of 2007-08, the economic situation in Europe is still unsatisfactory: stagnation, high unemployment, deteriorating infrastructure and insufficient investment in R&D and education. Last but not least, inflation has hit rock bottom, with recent quarters even showing signs of deflation.
These economic conditions have seen the European Central Bank (ECB) launch an unprecedented quantitative easing program worth €1,44 billion, which may even be expanded to twice this amount in the near future should conditions not improve.
Under these circumstances, it is no surprise that the European Commission (EC) and national economic and finance ministers have started to think hard about how economic growth could be reignited within Europe. On a macroeconomic level, Europe is in tremendous need of investment, in particular in the fields of energy infrastructure, transportation, and R&D in digitalization. This growth is essential for EU member states, not just to make their economies more competitive, but to stabilize their own worsening financial situations. In reality, however, most of these actions simply fall short of what is needed to rectify the situation.
One of the main reasons for this problem is a mixture of inability and unwillingness on the part of banks and insurance companies to lend to the real economy. To a large extent, this is the result of the many new regulatory requirements European lawmakers introduced following the financial crisis in order to stabilize the financial system and better protect investors. Banks are now required to hold much more capital than before and have thus embarked on a massive deleveraging process that has seen their balance sheets be substantially reduced in order to improve their capital ratios and satisfy the new regulatory requirements. At the same time, (life) insurance companies are also being compelled to retain a much higher percentage of capital against any long-term investment (e.g. such as investment in infrastructure projects).
Performance magazine issue 19, January 2016
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.