Very few people would disagree with the need for our banking sector to reform its practices, its culture and its purpose. Christine Lagarde, Managing Director of the IMF, last week made some well publicised comments at the Inclusive Capital conference attacking banks for their ‘fierce industry pushback’ to the process of these reforms. She also jumped on the Thomas Pikkety bandwagon citing financial inequality as a major challenge to the global financial order and proposing more progressive taxation as the answer. Actions such as these of governments and supra-national bodies are changing the shape of the financial world affecting how businesses and family offices operate in this new paradigm.
But are we yet clear on the impact of these changes?
Furthermore, what is the end game? Everything has a cost, and Sir Howard Davies, former Chairman of the FSA and Deputy Governor of the Bank of England, did a fine job at a lecture in London last week in outlining his view of the impact of the various political and regulatory changes on the economy. He made a number of points:
1) Regulators are now so hands on in the running of some large businesses that it’s arguable they could be seen as shadow directors. At times regulatory sign off might be required for ‘core management activities’ such as the level of leverage in an organisation, dividend policy and even signing off senior management appointments.
2) Finance is being ‘de-globalised’. For global regulated banks, used in the old world to upstreaming capital to their home jurisdictions, host regulators are now expecting in effect ‘subsidiaries’ to hold local capital in separate legal entities with local boards and local control. This is inefficient and leads to higher costs of capital.
3) More broadly, the cost of capital from regulated banks in the long term will be higher. Partially in respect of point 2 above, but also on account of higher capital ratios driven by Basel III.
4) For the holders of significant capital, such as private equity firms and family offices, there is a great opportunity to put it to use in a ‘shadow banking’ environment. There are signs of real growth in peer to peer lending, crowdfunding and the like caused by the constraints of regulators on traditional sources of funding. Are these providers going to be regulated as intensely as the banks, thereby constraining this form of liquidity? That remains to be seen but currently they are filling the holes in lending to small businesses and others that have been vacated by the banks.
So whilst the global banking industry continues with their ‘fierce industry pushback’ to this new paradigm, new opportunities are created. We’re seeing the rapid growth of niche, independent multi-family offices which continue not only to provide companies and wealthy families with the long-term wealth management services they require, but from within organisations that value society, philanthropy and innovation. I presume Madame Lagarde would approve of these developments.