Creditflux Newsletter

Wolseley went to Megabank’s credit conference recently and an excellent affair it was, too. Megabank struck just the right note of confidence and optimism without any of the bull market frippery of yesteryear.

There was no rock star emerging from the crowd to play a guitar solo and no gala opera dinner. The “star turn” was limited to a doyen of the regulatory community who reminded Wolseley of a rather disturbing clergyman.

One particular idea that our regulatory doyen favours to prevent us from sinning again is to grant him and his ilk powers to prevent rapid increases in lending to particular sectors of the economy.

If lending – to, say, the real estate sector, increases by more than the target amount over last year – then he would have powers to restrict or tax further lending. One of Megabank’s Chinese customers nodded enthusiastically and told Wolseley later that this was the approach adopted in China.

The regulatory doyen received a surprisingly warm reception from the Megabank crowd. The general sentiment was “we know we have been naughty and need to be punished so get on with it”.

Other presentations included a government strategist donning the mantle of credit analyst to predict a deluge of issuance from governments. She was followed by a syndicate official who predicted huge increases in issues from infrastructure companies, and a Chinese economist who predicted huge increases in demand for funding from fast expanding Chinese companies. And finally there appeared an environmental expert who noted the need for huge investment in green and clean technology. 

Maybe we need the regulators to protect us from these fast growing sectors. Certainly the credit market benchmark followers lapped up all the TMT issuance in 2000-01, and all the financial issuance in 2006-07. Or maybe, if regulators start imposing limits (shall we call them “corsets”) on bank lending then they’ll stop us funding governments, green technology, infrastructure and China.

Haven’t we seen this movie before? Didn’t Soviet planners develop five year plans where all-knowing central planners allocated loans amongst various cronies (sorry, companies) to ensure stable, balanced growth?

How depressing it is that senior regulators can propose such nonsense at a banking conference and not be laughed out of town. 

But don’t worry, all is not lost. Another platform speaker at the Megabank conference pointed out that legislators and regulators have a poor record of achieving whatever objective they set out to achieve. For example, the introduction of a ticker for corporate bonds designed to improve transparency drove liquidity out of the corporate bond market and into the US CDS market; and MIFID regulations designed to improve liquidity and ensure customers got access to the tightest bid-offer spreads, spawned dark pools and algorithmic trading.

In all likelihood the silly idea of setting loan targets will be dropped. If it isn’t, and regulators set out to constrain lending to certain sectors, can we guess the consequences? Maybe there would be a boost for Islamic finance as lending is reclassified. Or perhaps we would see the re-emergence of the conglomerate, as fast-growing companies look to buy “loan capacity” from sunset industries. 

Whatever happens, Wolseley thinks that next year Megabank should go back to bringing in a pop star for the star turn, because this year’s regulatory comedian really wasn’t very funny at all.