Furthermore, the effect of internationally agreed regulatory reforms — most of which have yet to be implemented — will be to increase banks’ capital requirements while shrinking the scale of maturity transformation risks that they can carry on their balance sheets. The “new normal” that results will likely include scarcer, more expensive long-term bank lending.
The World Bank report also says that, as a consequence of banking retrenchment, institutional investors with long-term liabilities — such as pension funds, insurers and sovereign wealth funds — may be called upon to assume a greater role in funding long-term assets. However, to facilitate this shift, appropriate financing vehicles must be developed, investment and risk-management expertise will have to be acquired, regulatory frameworks will have to be improved and adequate data and investment benchmarks will be needed. These investors must focus on the small and medium-size enterprises that banks often neglect.
Finally, local-currency bond markets — and, more generally, domestic capital markets — in emerging economies must be explored further, to lengthen the tenure of financial flows. Local-currency government-debt markets have performed fairly well during the crisis, while local-currency corporate-debt markets have played a more modest role as a vehicle for longer-term finance. This suggests that domestic reforms aimed at reducing issuance costs, improving disclosure requirements, enhancing creditors’ rights frameworks and tackling other inhibiting factors could bring high returns.
Anxiety over unconventional monetary policies and “currency wars” must not continue to dominate global policy discussions, especially given last month’s pledge by G20 leaders not to engage in competitive currency devaluations. Instead, global leaders should work to maximize the liquidity that unconventional policy measures have generated, and to use it to support investment in long-term productive assets. Such an approach is the only way to place the global economy’s recovery on a sustainable footing.
Otaviano Canuto is vice president for poverty reduction and economic management at the World Bank.
Copyright: Project Syndicate