As a member of parliament’s legal affairs committee, I noticed lately an avalanche of legislative initiatives and proposals designed to regulate financial institutions and their auxiliaries. It is good that we will have regulation in a market that was quite unregulated. It is good that we will have common norms and procedures, and common regulatory agencies, which implies standardisation and transparency.
It is also perfectly understandable that Europe must do everything possible to prevent the recurrence of another financial crisis. But it becomes clear that there are situations when excessive regulation may prejudice against people unnecessarily. Sometimes the legislative activity of the EU focuses on those who had no fault, or merely a circumstantial one, in triggering the financial crisis, and who did not receive a penny in aid from the member states’ taxpayers. They became the subject of anti-crisis regulation that goes beyond the limits of good practice and which could easily cause harm by generating unnecessary administrative costs or distortion of competition. Practically, this means a slowdown of the financing, or an appreciation of its costs, which affects both investors and investees. When I refer to investees, I think also of SMEs, which are the most dependent on an alternative financing to banking loans and securitisation.
One example is the alternative investment fund managers report, where a private equity fund or a hedge fund receives a treatment merely close to mutual funds or banks. We are talking here about sophisticated or institutional investors, who do not need protection and cannot be treated as the inexperienced small investors or bank depositors.
Another example is the credit rating agencies report, where a proposal that allows a competing agency to grant ratings for structured financial instruments subject to analysis by another agency, was almost extended to all financial instruments, including harmless plain shares and bonds.
A third example is the short selling report where publication of the net short position in a non-aggregate form may lead to abusive use of the disclosed information.
And finally, we have the example of the audit report, where putting the appointment, remuneration and duration of the auditor in the hands of a third party can distort prices and yet, the competition.
There is another major risk arising from the overregulation of financial institutions, namely that there are large emerging economies, such as BRIC countries which, together with the US, can make the European market a non-competitive place for financial services through their flexible regulatory system, compared to our heavy one. Capital is the easiest thing to move and it is the most sensitive to overregulation, and Europe needs capital and liquid markets.
Independently of our strong attachment to the real economy and how virulently we blame financial institutions and their auxiliaries, we must face the truth. I have seen lately declarations full of affection to production, which are respectively full of reproaches addressed to financial services. Both are faces of the same coin, indissolubly linked to each other. There is no real economy without financing, and there is no financing without the real economy. Any slide-slip leading to unbalances between the two sides is harmful. Passing this crisis, we have seen what it means to have too much debt, too much leverage. I do not wish to see what production would mean without financing. It would mean bankruptcy, job losses, and social crisis.