PRESS RELEASE

6December2012

Regulatory complexity threatens flow of credit according to Allen & Overy research

LUXEMBOURG –The regulatory approach governing the financial system lacks coherent design and is disabling the flow of credit necessary to fuel economic growth, according to research published on 3 December by Allen & Overy.

‘The Future of Credit’ report, commissioned in anticipation of the Financial Stability Board's (FSB) report on strengthening the oversight and regulation of alternative providers of credit, maps out the impact of regulation on the provision of credit globally, highlighting the confusion and uncertainty the ever increasing regulatory burden is creating.

With Basel III, among others, already affecting traditional bank lending, the FSB's proposed policy framework raises serious questions about whether non-bank credit intermediation will be able to fill the funding gap left by banks. This is especially troubling when the FSB's own statistics show that banks are the only institutions to have increased their share of financial assets in the past five years – up USD26.6 trillion since 2007 – but lending levels remain constrained.

Despite the benefits alternative providers can bring to the real economy, the FSB's announcement indicates they face being regulated like banks. This ignores the fact that different participants in the financial markets pose differential degrees of systemic risk, and may not merit any intervention at all.

Set against a back drop of the vast array of financial regulation already working its way through the system, which is expected to run to 60,000 pages of new bank regulations in the EU alone*, Allen & Overy believes it will take years to clarify exactly what the growing number of regulations mean, creating confusion and uncertainty in the market and bringing with it a prolonged period of credit paralysis.

Commenting on the research, Alistair Asher, Head of the Financial Institutions Group at Allen & Overy, said: "We believe that policy makers must consider what steps they can take to free up the provision of beneficial credit – whether from traditional or alternative sources. If they fail to take a radical approach to this issue, we believe business will continue struggling to access finance with clear consequences for broader economic growth."

Key findings from the ‘Future of Credit’ study include:

  • Opportunities for investment funds: in most of Europe there is greater scope for lightly regulated and unregulated investment funds to be able to provide credit. But questions remain over whether the FSB's proposals mean this will be a short-term trend before the regulatory tap turns off the flow of much needed credit from this sector. They are also unlikely to be able to bridge the funding gap on their own and provide only part of any comprehensive solution;
  • Time to realise the potential of insurance companies: Despite the uncertainty that still surrounds Europe’s Solvency II proposals, there is still great untapped potential in the insurance market. The question remains over whether regulators will promote them as a source of alternative funding and in what quantities. But the neutral regulatory outlook could be seen as positive given their relative competitive position against other market participants;
  • Scope for regulators to liberalise European regulated funds (UCITs): Europe's regulated funds (UCITs) are a clear source of funding in the bond and covered bond markets but there is an opportunity for regulators to liberalise these structures to enable them to take a broader role in the credit markets.
  • Banks remain the bedrock: It is clear that banks face the greatest pressure from regulators of any participants in the market. The knock-on effects of this are already apparent. But despite all the changes banks will remain the pivotal players in structuring large, complex financial transactions, where multiple pools of capital need to be accessed. The value of intermediated financial assets from banks remains twice that of any other group and they are the only institutions, other than central banks, to see their share of assets increase since 2007.

Henri Wagner, Managing Partner of Allen & Overy Luxembourg, added: "The GrandDuchy of Luxembourg has a major role to play in the provision of alternative credit because of, among others, the presence, on our territory, of financing platforms created by promoters of securitisation undertakings, powerful private equity houses and asset managers, regulated and unregulated investment funds, pension funds and insurance companies, which all have, as a common feature, significant financial resources and the strongdesire to finance the real economy. It is therefore crucial that the Luxembourg regulator'sinterpretation of the legal framework is flexible enough to allow a sustainable development of the financial sector, in a secure legal environment, as a significant part of our national economy."

Link to the Future of Credit Report

For further information, please contact

Aurélia Wieseler (Marketing and Communications Manager)

, on +352 44 44 55 124.

Notes for Editors:

1.* Recent speech by Bank of England's Andrew Haldane in the U.S.

2.Methodology The ‘Future of Credit report’ was compiled by Allen & Overy’s leading finance lawyers, who assessed whether the black letter law (i.e. crystallised measures) being introduced through new legislation was having a positive, neutral or negative impact on, among other things, the provision of credit across 11 separate areas of finance in 13 key jurisdictions around the world.

3. Allen & Overy is an international legal practice with approximately 5000 people, including some 510 partners, working in 42 offices worldwide.

4. In this press release 'Allen & Overy' means Allen & Overy LLP and/or its affiliated undertakings.

5. The term 'partner’ is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings.

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