CREFC Europe: Warning on US-style approach to financial regulations

By Paul Norman - Friday, May 19, 2017 13:34

Experts have warned an “overly prescriptive” US-style approach to financial regulations could create systemic risk, rather than improving the stability of the financial system.

Speaking at the CREFC Europe spring conference in London last week, former Lloyds Bank chief economist Professor Trevor Williams claimed that a "UK-style principles-based system" with a greater focus on transparency would be better suited to mitigating risks such as those that led to the global financial crisis.

The comments follow calls from the European Union’s financial services policy chief for the United States to maintain its commitment to global financial rules put in place since the crisis. President Trump has suggested he might remove Obama-era financial regulations and has tasked US regulators with producing a study on their efficacy.

Peter Cosmetatos, chief executive of commercial real estate lending trade body CREFC Europe, said: “The European commercial real estate (CRE) finance market is in a reasonably good place at the moment, all things considered. But while we have seen the market grow more diverse, transparency has reduced as securitisation has failed to recover post-crisis – partly for regulatory reasons. In spite of limited market transparency, the chronically low interest rate environment and quantitative easing continue to drive investment capital into CRE debt.”

Prof Trevor Williams, visiting professor at University of Derby and former chief economist at Lloyds Bank, said: “Overly prescriptive regulation forces everyone to act in the same way and forces behaviour which leads to systemic risk. We shouldn’t tell institutions what not to do, but instead have broad rules and behaviours rather than US-style prescriptive rules defining compliance and non-compliance.

“UK-based regulation – the principles-based regulation regime that we should be adopting – makes a lot more sense. I think we’ve been adopting a US-style rules-based prescriptive approach where everything is written down rather than a principle-based approach that allows far more flexibility and the ability to interpret policy differently for the different instruments that exist in the marketplace.”

Professor Williams added: “What’s required is total transparency – the crisis was caused not by a lack of an understanding of risk. What led to the last crisis was that institutions didn’t know what risk they were taking on.

“A greater focus on transparent sharing of data and analytics is required. Shining a light on this is about the ability to use the power of big data which we derive from the power of computer systems we now have. What’s crucial is interpreting these data properly, which requires a commitment to publishing aggregated – non market-sensitive – data."

Remarks from fellow panelists at the conference’s session on capital flow trends warned that with traditional investment classes paying persistently low returns, many investors have been willing to look at alternative asset classes such as build-to-rent and student accommodation that might, in different circumstances, have been considered too risky.

Paul Jayasingha FIA, senior investment consultant – manager research at global risk management advisory firm Willis Towers Watson, said: “Approximately €2 trillion of UK pension fund liabilities are maturing and there are not enough index-linked gilts today to satisfy that de-risking. So, pension funds have to look at alternative areas where investors are paid to take the illiquidity risk.”

Peter Cosmetatos added: “Policymakers would do well to promote better market information so that debt investors are in a better position to understand the risks, as well as the returns, of this asset class. A principles based approach more generally would not only promote stability through diversity – it would also encourage market participants to take responsibility for their decisions.

“The Bank of England is to be applauded for supporting industry efforts to assess and manage risks associated with the property cycle, and to find a way to pool data in a more reliable, granular and timely way than can currently be achieved. These central recommendations of the 2014 industry report, A Vision for Real Estate Finance in the UK, are the foundations on which a sustainable and successful CRE finance market can be built.”

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