Financial regulatory factors affecting the availability of long-term investment finance
The most important contribution of financial regulatory reforms to LT investment finance is to promote a safer, sounder and therefore more resilient financial system. If implemented in timely and consistent manner, these reforms will help rebuild confidence in the global financial system, which will enhance its ability to intermediate financial flows through the cycle and for different investment horizons. For this reason, the G20 regulatory reform programme is supportive of LT investment and economic growth.
FSB members have identified a number of regulatory reforms that may affect LT finance. These include Basel III, over-the-counter (OTC) derivatives market reforms, and the regulatory and accounting framework for different types of institutional investors. Many of these reforms are still in the process of policy development or at an early stage of implementation. The regulatory community is vigilant to avoid material unintended consequences and to analyse potential impacts prior to finalisation of the reforms.
The reforms do not specifically target LT finance. For example, Basel III neither introduces higher risk weights nor requires matched funding on bank exposures with maturities of over one year. However, the reforms do alter the incentives of different types of financial institutions to participate in this market as well as the costs of different types of transactions. As the balance of incentives changes, institutional investors - which are the most natural providers of LT finance in the financial system - will need to assume a greater role in this market. Anecdotal evidence suggests that this process is underway, but it can take time and is not uniform across different financial market segments or regions. An important issue going forward is whether the regulatory framework enables non-bank providers of LT finance, particularly institutional investors, to step up their involvement in this market. Continue reading