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Over-the-counter (OTC) derivatives are an important means to hedge risks in financial markets and are therefore key tools for companies, authorities and financial institutions in managing their exposure to risks linked with interest rates, exchange rates, commodity prices etc. Prior to the financial crisis, OTC derivatives markets were largely unregulated. In 2009, the G20 leaders agreed that all standardised OTC derivative contracts should be cleared through CCPs, that all derivative contracts should be reported to trade repositories and that non-centrally cleared contracts should be subject to higher capital requirements. In the EU, the G20 commitment is implemented by the EMIR which was finalised in February 2012 and approved by the European Parliament in March 2012.
Deposits are the most important source of funding for European banks, providing about 60% of the total. At the same time, private-sector deposits tend to be less volatile than other funding instruments. The importance of deposits is set to increase even further in the medium term because of new regulatory requirements and higher levels of risk aversion at banks. Boosting deposit volumes could enable moderate growth in bank assets and thus also an increase in lending to the private sector over the coming years. However, this would require that households hold a larger share of their savings in the form of deposits and invest a smaller proportion in insurance policies.
The Financial Stability Oversight Council (FSOC) is the newly created macro-prudential supervisory agency in the US, charged with safeguarding the US economy from future financial crises. It has made important strides in developing this newly defined policy field. Moving forward, the FSOC has an important responsibility to develop macro-prudential policy in coordination with international and domestic regulatory institutions. This cooperation is essential given the interconnected nature of global financial institutions and cross-border systemic risks. Eventually, macro-prudential supervisors around the world will greatly benefit from a global understanding of the global markets they are confronted with and the international distribution of financial risks. The FSOC’s work will be a key element in achieving a global perspective.
Remuneration drives incentives. This applies to both commission-based as well as fee-based remuneration. However, remuneration is only one of several factors which influence the quality of investment advice. Other factors are the (financial) literacy of consumers, cost transparency, handling of complex products, advisor qualification and other internal incentive systems. So quality assurance requires a holistic approach, both for the regulatory regime and for internal bank management procedures. Fee-based and commission-based models have their advantages and disadvantages, depending on the investment objective, holding period and other client preferences. For this reason, the coexistence of differing remuneration models would appear to be the most suitable way to guarantee proper provision of investment advice for all consumers.
The German federal government plans to promote start-up financing for young innovative companies. An investment grant for business angels as well as a further tax privileges for venture capital funds and their investors are under debate. The idea is praiseworthy, but a real investment boom also requires highly developed stock markets where innovative companies achieve high prices.
End-February, the ECB provided banks with EUR 530 bn of liquidity for three years via its longer-term refinancing operations (LTRO). As with the first three-year LTRO in December 2011, the provision of liquidity is designed to avert tensions over bank lending. The first three-year tender has also had an effect on European government bond markets. As mainly Italian and Spanish banks increased their exposure, yield curves for Spanish and Italian bonds shifted downwards at the short end.
Lending trends in Europe and the US are currently diverging. Indicators point to a further slowdown in the euro area, even though a credit crunch has so far not materialised. In the US, by contrast, the outlook has considerably improved in recent quarters and loan volumes are growing again.
Macroeconomic and debt market conditions indicate restrained investment activity by PE funds this year. European PE investments in 2012 are likely to be 8 to 17% lower than our estimate for 2011 – although a lot will depend on the management of the European debt crisis. Historical evidence suggests that periods of low growth and sluggish fundraising – as seen in Europe at present – tend to make for PE vintages with strong returns. This holds even in comparison to investments in public equity as the analysis of public market equivalents illustrates. However, the overhang of uncalled capital commitments (dry powder) and potential competition from cash-rich strategic buyers might bear on this effect this time, meaning that PE performance might eventually be somewhat lower than pure historical experience would have suggested.
“...The high debt tolerance of the past was based on an erroneous assessment of credit risks. In the private sector people thought the risks could be calculated precisely and they relied on models that were based on the complete rationality of economic actors and efficiency of the markets. Since these two assumptions are not always borne out, these models delivered flawed risk metrics.....“