Strengthening the role of long-term investors

Unprecedented official policies have helped to restore financial market stability. However, more than seven years after the financial crisis it is questionable whether the benefits still outweigh the costs, such as asset bubbles, economic inequality, reputational damage for central banks and a “tax” on savers. Swiss Re has identified three policy areas where reform could mitigate these effects and significantly enhance the long-term growth outlook.

The first is to strengthen private capital market intermediation. In the EU up to 80% of financial intermediation takes place through banks, which due to regulatory pressure have been reducing their balance sheets. This directly impacts their ability to lend, with clear implications for growth. Furthermore, the significant central bank holdings of various debt securities has created significant price distortions.

The second area is public sector support for the development of tradeable asset classes, specifically in relation to infrastructure investing. In 2013 just 24% of infrastructure finance was through tradeable project bonds with the rest in illiquid bank loans. Greater emphasis on project bonds in tradeable form, achieved with standardisation, as well as strengthening investor rights more generally to tackle well-known policy risks, would significantly enhance accessibility of the asset class.

Finally, a conducive regulatory and policy environment would allow long-term investors to exert their natural role of acting as a financial market stabilizer and channel funds to the real economy. Policymakers need to prevent short-termism and support economic growth and job creation. The table below shows that long-term investors hold assets worth 91% of global GDP, giving them the potential to be key financiers of growth and development projects.

Some progress has been made on these issues. In 2015 the Juncker Commission on Capital Markets Union (CMU) proposed changes that directly address infrastructure investing and securitisation:

• On infrastructure, the Solvency II framework for insurance regulation has a new concept of ‘qualifying infrastructure investments’ for a defined set of safer investments. These will benefit from a lower capital charge, making the asset class more attractive for insurers.
• On securitisation, the CMU has proposed a new regulatory framework, aimed at rebuilding trust in the market and improving the financing of the EU economy.

While these initiatives are very welcome, there remain significant policy changes which could help mitigate the effects of financial repression and promote a more resilient and sustainable growth outlook.