Intesa Sanpaolo S.p.A.

Transcription

1 Intesa Sanpaolo S.p.A. IRMC 2012 The Unintended Consequences of Re-Regulation Rome, 19 June 2012 Mauro Maccarinelli Head of Market Risk and Financial Valuation Risk Management Group 1

2 Re-Regulation (1/2) Regulatory efforts look very frantic and focused on improving the current micro-prudential approach The new regulatory environment is certainly not detrimental to build up a more liquid and solid banking and financial sector: it sounds good to the extent the crisis was a consequence of mispractice in traditional banking: i.e. borrowing short term, leveraging significantly, investing in longer-term /illiquid assets However, such a new regulatory body may well not be the optimal response in the new normal environment characterized, by extreme tail events whose devastating effects may even be magnified by these new rules. Financial regulation is falling short of addressing the exceptional events of current crisis: from this point of view we are essentially in the same place where we were when the crisis erupted 2

3 Re-Regulation (2/2) Why is financial regulation falling short? 3

4 Real problems in Global Markets Total Debt in Advanced Economies at Unsustainable Levels Worldwide credit extension is unprecedented and the most of this debt is non selfliquidating Total Debt/GDP ratio is to unusually very high levels (US, UK, Japan, Spain, Greece...) Current world is gauged of plenty of loans to real estate, to everyday consumer and a lot of corporate debt is related to finance: this is inflating bubbles with no regards to the real contribution to GDP growth Just as rapid expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn Snowball effect: the Debt/GDP ratio can increases because of a negative GDP growth: GDP lowers when Government Debt >90%, this threshold is lower for External Debt* Bank of Canada Governor (Mark Carney): Minsky Moment has arrived debt accumulation is leading to a sequence of financial/fiscal crisis (stability feeds unstability) *Cfr. Reinhart e Rogoff, Growth in a time of debt,

5 Real problems in Eurozone Greece is not the problem Greece is the symptom of a profond malaise that is affecting the Eurozone (as Lehman wasn t the cause of the 2007 financial crisis) Surplus countries have been financing the deficit countries since Eurozone inception, to the tune of 1.5 trillion (see following graph) Even in optimistic scenarios of growth the primary surplus needed for a sustainable public debt is high (see following table) Primary Surpluses Needed (April 2012) Euro Countries Nominal Growth Rate 2% 4% Austria 0.64% -0.83% Belgium 1.47% 0.45% Finland 0.16% -0.88% France 0.82% -0.90% Germany -0.14% -1.81% Greece 33.57% 30.35% Ireland 5.23% 3.09% Italy 3.66% 1.26% Netherlands 0.16% -1.13% Portugal 11.19% 9.16% Spain 2.16% 0.80% Source: The Kiel Institute 5

6 Core of new regulation does not take into account that we are in a New Normal era Deleveraging introduces structural headwinds opposed to cyclical tailwinds Against the background, monetary and fiscal policies are near to be exhausted, traditional engines of recovery almost out-of-order Inventory cycle (only one working) Consumer spending Employment gains Revival in residential construction Recession vs. Depression In a recession economy is revived by government stimulus, in a depression economy is sustained by governement stimulus Stability threatened by sudden shocks Depletion of Safe Assets Profit & Loss distribution flatter and fatter 6

7 Regulation is triumphing in the micro-side of banking sector (1/2) Unintended consequences: 1. Assets are being removed from trading book (and are placed into the banking book) Price discovery on real value of assets is going to be lost 2. Herd behavior in government bonds: investments are driven by new prudential requirements, collateral practices and central bank operations A case of Financial Repression? 3. Lending is becoming difficult for banks 1. A further review of bank trading books will probabily result in higher capital requirements: Basel 3: moving from VaR models to Expected Shortfall models to sufficiently cover tail risk (focusing on statistics and not on risk strategies) 2. The possibile imposition of a minimum haircut on collateral used in repo transactions could exacerbate the funding problems of many banks 7

8 Regulation is triumphing in the micro-side of banking sector (2/2) Present structural imbalances need to be approached through high level economic policy, that should sustain plans for economic growth and activities that adds value to the economy and do not pump bubbles Against this high-level background, specific banking regulation should favor: Projects for the development of the employment, training and environmental protection Self liquidating credit: loans that pays for itself via the production it helps generate Rethinking of safe assets: tangible assets with intrinsic value as hard assets and other uncorrelated trades 8

9 The worst is not over Forewarnings signals: Deposit outflows in Eurozone (as pulling of collateral from Lehman was a signal of its bankruptcy) Banking sector Government sector The risk of a sudden capital flight could expand from the bank sector to the government one banks appettite to buy further government bonds may prove limited if they start to suffer deposit flight Although a decive policy intervention could stop capital flight, even the creation of a Euro deposit guarantee scheme could be not enough if investors fear a disaggregation of the Eurozone. 9