Florian de Sigy By Beverly Chandler, Opalesque London:
A probably unintended result of regulatory change designed to improve liquidity and transparency in institutions is driving business into the secondary market, says Florian de Sigy, chief executive officer and founder and Ben Keefe, investment director and head of advisory at Gamma Finance.
Insurance companies will be subject to Solvency II and banks to Basel III, regulatory initiatives designed to limit the potential for a recurrence of the liquidity crisis of a few years ago. Keefe explains: "One of the main tools in the regulators armoury is the ability to charge higher regulatory capital for illiquid assets resulting in a shift in the liquidity profile of the balance sheets of financial institutions. The endgame is that institutions need more liquid transparent assets relative to before. We are seeing a raft of institutions selling off their private equity arms and this is a result of the increasing regulatory capital that the groups would need to support these businesses."
Keefe believes that it is entirely right and proper that these initiatives are being rolled out but has observed an interesting effect that may have a negative impact on the continuing recovery of funds stuck with illiquid assets. "Banks are being required to increase their capital ratio and they can do this by increasing cash or reducing riskier assets" he says. This results in a reduction in lending which impacts directly ......................
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