AVS Scientific Panel - Regulatory / Development of financial markets | AVS Valuation

AVS Scientific Panel – Is the current regulation of banks sufficient…

Since the financial crisis in autumn 2008 extensive steps in the regulation of banks have been set. And these regulations are not yet completed – Basel III as well as regulations under MIFID II and EMIR employ the banks continue.

Currently the European Central Bank (ECB) calculated precisely, for more than 100 European banks new minimum requirements for core capital. In this situation naturally also the respective business model of banks is under scrutiny. Institutions which do not have a sustainable business model will come under pressure.

General the banks have different ways to meet the requirements of the regulators. In addition, there are also still supportive measures by central banks.

  1. Capital injections
  2. Generating profits
  3. Retained earnings
  4. Reduction of Risk Weigthed Assets (RWA)
    • Sale / reduction of risks
    • Securitization of risks
    • Exchange risks – for example, by Collatertal transactions
    • etc…

In the case of capital injections  and generating profits minimum requirements for profitability are expected. It is particularly to be considered in government-related banks, that a future capital increase does not have the nature of state-aid.

… or should the financial market in Europe be further developed?

In addition to the regulation of banks it is also necessary to develop the capital market in Europe. Unlike in the US, the refinancing of companies in Europe is still dependent on the banks. Long-term investors such as insurances, pension funds and other long-term investors are starting to invest in corporate loans, infrastructure loans or real estate loans. In order to intensify these activities, these investors are forced to expand their knowledge on the one hand in such instruments; on the other hand there should also plenty of products available. The basis of these products are in the underlying assets. In other words, the coroprates, real estate and infrastructure developers have to provide enough “assets” directly.

Alternative sources of funding for the banks are therefore imperative. The banks will not be able to meet in full even for regulatory but also for reasons of business policy, these refinancing function. Thus also will bring a reduction of the direct links between banks andinsurances, because insurance companies are classically considered a significant source of funding for banks. In this case it is also a better distribution of risk and the European financial system could be more stable as a whole.

Please see the comment by Prof. Dr. Martin Hellmich. Mr. Hellmich is also chairman of the Scientific Panel of AVS-Valuation GmbH.


An article of AVS-Valuation GmbH, Frankfurt am Main. For inquiries, please contact us at clientsupport@avs-valuation.com.

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