AMSTERDAM – One of the major challenges facing the European economy is the lack of liquidity in its capital markets. Since the 2008 global financial crisis, an enormous number of new rules have been put in place. In order to facilitate the long-term investment that Europe desperately needs, it would be wise to reassess the broader regulatory environment that has emerged over the past six years.
With banks reluctant to make new loans, institutions such as pension funds are well placed to meet the desperate demand for capital. Indeed, the savings of workers who may not be retiring for several decades are particularly well suited for long-term investments. The trouble is that in many cases, rules and regulations intended to ensure financial markets’ stability impede the ability of pension funds and others to allocate savings smoothly and efficiently.
The importance of proper regulations cannot be understated. When properly drafted and applied, they ensure financial stability, maintain (and, if necessary, restore) confidence in the markets, and facilitate long-term investment, helping citizens meet their future financial needs. But if regulations are not well tailored to the various types of market participants and to how markets actually work, they can choke off opportunities that would otherwise benefit investors and the economy.
The new margin requirements for derivatives, introduced in order to reduce systemic risk, are one example of such a chokepoint. It might make sense to apply them to banks or hedge funds, but pension funds are highly creditworthy institutions that pose little or no systemic risk to financial markets. Forcing them to set aside assets for collateral purposes only drains capital that could be used for long-term-investment.