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Regulatory complexity threatens flow of credit

“The regulatory approach governing the financial system lacks coherent design and is disabling the flow of credit”, according to research by Allen & Overy.

In a report published today, the international law firm responds to expectations that the Financial Stability Board (FSB) will strengthen the oversight and regulation of alternative providers of credit.

And the firm argues that the FSB’s proposed policy framework raises serious questions about whether non-bank credit will be able to fill the funding gap left by banks.

It suggest that this is especially troubling when the FSB’s own figures show that banks are the only institutions to have increased their share of financial assets in the past five years (up $26.6 trillion since 2007) but lending levels remain constrained.

The study also highlights the dangers of the FSB ignoring the fact that different participants in the financial markets pose differential degrees of systemic risk, and may not merit any intervention at all.

The report states: “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.”

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