Risks and financing: societal challenge and responsibility of financial intermediaries
Our era is marked by events and challenges of unprecedented brutality that can cause existential shocks. Three current crises put the future of the planet at stake: the pandemic, which has almost been forgotten, the Russian-Ukrainian war, which after a phase of stupefaction is returning to the normality of crises, and finally the exit from negative interest rates through inflation, which was expected but whose scale is surprising. Three crises in a structural context of a double environmental and digital revolution that will have an unprecedented impact on our lifestyles, the value of goods and the structure of investments. The risks ahead are immeasurable and many experts are at a loss as to what solutions to recommend. Theory is absent. The tools are adapting by trial and error. Beyond political strategies, the positive outcome of these crises is in the hands of financial intermediaries (insurers, banks, management companies). Indeed, their essential mission consists in structuring financing to reduce the levels of risk that they present to final investors, in particular households, and to optimize the duration and flow of savings towards the investments necessary to face these challenges.
In this context, civil society and entrepreneurs must, more than ever, act with discernment and courage to avoid any misdirection. But this will not be enough. A collective risk management strategy is needed. Risk means: who in fi ne will assume the losses?
Three possible answers:
- State risk-taking: the national budget assumes the fi nancial risk, implying an increase in public deficits, which are already high in France. However, such an option would also entail a courageous restructuring of these deficits by drastically curbing operating expenses and strategic and patrimonial management of investment expenses within the framework of multi-year commitments, accompanied by expert controls and reports to Parliament.
- Risk-taking by investors and in fi ne citizens (savers): This is the long-awaited development of market-based financing of the economy and the European project of the Capital Markets Union (CMU). It is clear that the nature of the financing required and its risk profile imply a diversification of the sources of financing. This will require the construction of a complete ecosystem, from short to long term, from institutional to individual, based on the articulation between a savings/investment strategy and a substantial capital market, representing around 50% of financing needs.
- Risk-taking by financial intermediaries: of course these actors, in their intermediation function between short and long term, between deposits and credits, via bank or investor balance sheets, via the balance sheets of insurers, must take their responsibilities. But this touches on the EU's prudential strategy. Thus, it is clear to society that our collective interest is to minimize the systemic risks and therefore the possible failures of these institutions, whose size is also a factor of success and competitiveness.
This equation is complex. It is a question of finding the right balance between these three responses by coupling a dual strategy of long-term investment and risk management. Long-term investment must be targeted through the measurement of externalities, and public institutions must take on risks that are difficult to quantify in conventional financial models. As far as intermediaries are concerned, the risk coverage "cushions" must be adjusted as much as possible, and in particular prudential capital. Regulation must be integrated into a real strategic vision. For example, in the case of insurance, Solvency 2 defines capital requirements at around 250% of risks. 160% is considered a minimum. The gap is the subject. In its analysis of the terms of the revision of this directive, the Commission seems to take this dimension into account. This is crucial and augurs well. The same applies to the European transposition of Basel III/IV. The EU is certainly behind, but it is nevertheless ahead of its Western partners... Let's set an example!
To do so, it would be interesting to take inspiration from the initiatives of the US Treasury in 2017. Conduct a strategic review of our financial regulatory system from the dual perspective of financing and risk, while remaining ambitious in each of these areas of analysis: emerging from crises from the top without compromising on risk. A protective and responsible Europe!