Financial Innovation in the Transatlantic Economy
Last week I attended a conference sponsored by EUCE (European Union Center of Excellence) on “Financial Innovation in the Transatlantic Economy”. The conference proceedings showcased:
Generators of financial reform efforts in the US and European Union
Future trends in regulation
Financial challenges under Basel II
European financial reform and access to finance and commercial bank lending
Business growth strategies and access to capital
The speakers included:
Mr. Edouard Franciois de Lencquesain, from Paris Europlace (former S.W.I.F.T. board member)
Dr. mark Blyth, Professor of International Political Economy, Brown University
Ms. Cecile Noziere, CEO of Finadvia LTD (formerly Credit Lyonnais)
Keith Green, Vice President of Government Relations, ING North America.
There were several key items are of interest and importance to C-Suite business leaders as they chart the cost of capital, financial reform and the likely impact on their companies. Here are some of their comments to consider:
a. Innovative financial products help spur business growth and this innovation is likely to continue. What this means to companies is the way in which business are financed is likely to evolve. Public/private partnerships are likely to continue, interbank products and services will evolve as the way in which financial institutions evaluate lending risk continues to change. For business expanding overseas this means reliance on only bank funding will limit opportunities to grow. Evaluating government, public/private partnerships should be thoroughly explored to maximize funding options.
b. The financial crisis looks (looked) different to different markets. The response to the financial crisis is quite different around the world. For example, Canada for example has weathered this particular crisis better than the US as a result of decisions taken with regard to financial risk, regulation, capital requirements and consumer behavior. When expanding globally, consider that your firm may be evaluated using a different economic model. Make sure you understand that country’s model and include this as part of your financial evaluation.
Another reason that forecasting the economic crisis wasn’t more precise was the intersections of interest were not obvious because of heavily siloed organizations. While this is a continuing problem in organizations it has particular implications for regulators. Horizontal thinking and innovation may have helped avoid the catastrophic results of failing to share and understand information. We need a way to look at the impact of regulation of markets so the impact across governments, institutions and borders is apparent. Failure in this area is not an option which may spur additional innovation.
c. Politicians and regulators don’t necessarily really understand financial markets and the impact of their decisions. In general, their ability to assess and analyze risk factors is limited and this subject is complicated. It can only be dumbed down so far.
d. Basel II reforms will affect large as well as small banks. While smaller banks will not necessarily participate in Basel II, they will be affected by the risk sensitivity of capital allocation requirements, quantifying operational and credit risk, among other standards. (Basel II is the second of the Basel Accords which are recommendations on banking laws and regulations. The purpose is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the type of financial and operational risks banks face. Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall market stability. It use a “three pillars” concept, A. Minimum capital requirements, B. Supervisory review and, C. Market discipline to promote greater stability in the financial system. Basel II accords have been adopted by countries around the world but timetables and implementation vary widely.)
e. GDP of EU is number one in the world but their influence doesn’t always equal income. As such the EU seeks to increase competition, level the playing field and reduce risk in the financial arena.
f. Private equity funding for small businesses will expand as cost of capital for this group tightens. In addition to exploring government, public/private partnership groups growing companies should look to explore private equity funding opportunities. However care must be taken to identify private equity firms with robust business experience, solid financial and operational leadership skills. Private equity firms are also seeking to reduce their exposure to risk so an understanding of how risk is apportioned is critical.
Birchtree Global staff will be attending several financial and legal conferences over the next several weeks and will provide our clients and readers with updates and alerts.
For additional information on this article please contact Janet Walsh-01 770 590 8338.
