LMA consults with European Commission on long-term financing solutions
26 June 2013The LMA, in consultation with a working party consisting of both bank and non-bank members, has responded to a European Commission ("Commission") consultation which considers the need to overcome barriers to long-term financing and diversify the system of financial intermediation for long-term investment in Europe. Whilst the LMA is very much supportive of the Commission's desire to overcome present barriers, the following points have been highlighted as part of its response:
1. Banks must continue to play a role in the provision of long-term financing
The LMA has stressed that banks play a vital role in the provision of long-term finance as a result of established origination platforms; global branch networks; existing relationships with borrowers; ability to offer a wide and flexible range of banking products and services; and the capacity to carry out their own credit analysis, without the need for external ratings. All of these factors combined emphasise the fundamental role that banks must continue to play in the provision of long-term financing and indeed, any form of financing designed to bring about long-lasting economic recovery in Europe.
2. Importance of non-bank investors to long-term investment
As major banks are deleveraging, it is important that other, non-bank investors are found to plug the gap and ensure that the funding requirements of businesses continue to be met. This is particularly pertinent given the regulatory treatment of banks following the implementation of CRD IV, which will make lending on long tenors generally less attractive for such institutions. Whilst non-bank investors are already present in this space, the LMA believes much could still be done to broaden this valuable investor base.
3. Importance of the syndicated loan product
The syndicated loan product is an essential financing tool in the provision of long-term debt to borrowers due to its simplicity and flexibility. It should not, therefore, be overlooked as part of the Commission's review. Whilst new and alternative financing arrangements could fill a proportion of the funding gap for long-term investment, the syndicated loan product is an established form of debt provision, which many borrowers and lenders are already comfortable with using.
4. Regulatory challenges remain the prime barrier to investment
The LMA believes that regulation is one of the greatest barriers currently inhibiting lending on a long-term basis, specifically requirements to increase core capital and the introduction of new leverage and liquidity ratios. Although the LMA supports better bank capitalisation to increase stability in the financial system and recognises the need for appropriate and targeted regulation, the unfortunate side effect of the new regulatory environment is that bank capital is being driven away from those who need it most and is inhibiting growth within the wider economy. On the non-bank side, there remains a great deal of uncertainty with regards to regulation – particularly since legislation such as Solvency II has not yet been finalised and concrete proposals regarding shadow banking regulation have not yet been published. If investors are to be incentivised into making long-term investments, there needs to be far greater long-term visibility on what their regulatory cost of capital will be.
5. Non-bank investment for SMEs likely to remain challenging
The LMA is of the view that, although it may theoretically be possible for SMEs and micro businesses to access alternative forms of finance, in practice, these are likely to be difficult to establish since many non-bank investors are not presently set up to finance these kinds of borrower.
6. SMEs require access to all types of finance – not just long-term
SMEs require access to all types of finance – for example, regular and predictable sources of working capital finance are equally important and should not be disregarded simply because they fulfil a slightly different function. The LMA would stress that the Commission's aim is to achieve a long-lasting economic recovery. This does not automatically translate into a need for financing solutions which are long-term in nature – rather, regular, reliable, flexible and above all, ongoing investment is arguably far more important, especially to the SME community. The LMA has therefore questioned whether the Commission should consider addressing the issue of SME financing as a separate policy consideration.
Clare Dawson, Managing Director LMA, commented:
"Long-term financing requires long-term regulatory certainty which is not, at present, available."
"We are fully supportive of the Commission's statement that there is a need for "appropriate calibration and progressive implementation" when it comes to regulation. We are hopeful that this signals a desire on the part of the Commission to undertake a review of existing regulation in order to ensure that it does not have an adverse impact on future economic recovery."
"The Commission's wish to promote long-term funding and the SME market is welcomed. However, as our submission highlights, this is not without difficulties, some of which arise from the intended and unintended consequences of recent regulatory proposals."