A presentation held by Professor Nicolas Véron, Bruegel, at the high level seminar "Towards a sustainable financial system" hosted by the Stockholm based think tank Global Challenge in cooperation with London School of Economics and The Swedish House of Finance on September 12th 2013.

1. 1
Banks vs. Non-Bank Credit in
Europe
Nicolas Véron
Senior Fellow, Bruegel (Brussels)
Visiting Fellow, Peterson Institute for International Economics (Washington)
Conference ‘‘Towards a Sustainable Financial System’’
Stockholm, September 12, 2013

2. Banks vs. Non-Banks
Source: FT 500 rankings by region (end-March 2012), author’s calculations.
“Others” include securities firms and brokers, payments and credit card
companies, specialized financing companies, and investment managers.
Family-controlled holding companies, real estate companies, exchanges,
conglomerates with a financial-services arm (e.g. GE), and credit rating
agencies are excluded.
2
Source: ECB, People’s Bank of China

3. The Financial Shock of 2007-08 & Aftermath
 * includes Australia, China, India, Indonesia, and Korea (in 2012 China represented 60% of that area’s total GDP).
 Vertical axis in USD bn. Source: S&P (2012) based on central banks, Eurostat, IMF and BIS data
0
5000
10000
15000
2005 2006 2007 2008 2009 2010 2011
United States
Nonfinancial Business Loans
Nonfinancial Business Bonds
Total (USD bn)
3
– Bond markets take the baton from banks in US, allow
subsequent bank restructuring / deleveraging
– No alternative credit channel in Europe

4. The Case for Diversity
 Financial Stability
– “Symmetrical” shock in 2007-08
– US: crisis over in 2009
– Europe: crisis still ongoing
 Finance and Growth
– “Frontier” growth: hi-tech / service innovation
– Ill-served by traditional banking
4

5. Financial Systems and Company Growth
“Population pyramids” for companies in FT Global 500 ranking, Sept 30, 2012, by region of
headquarters (headings indicate size of respective samples). Author’s calculations
Median birthdate: 1880 Median birthdate: 1944Median birthdate: 1912
5

6. Shadow Banking: Crisis Experience
 Off-balance-sheet commitments by banks
– Banks’ ABCP conduits and special-interest vehicles
– Commitments in the repo market
– Too much risk retention by banks in securitization, rather than too
little
 Constant-Net-Asset-Value Money Market Mutual Funds
– Borderline to misselling of investment products
 Complex mortgage securitization malpractice
 NOT non-bank financial intermediaries
– Hedge funds, private equity, loan funds
 NOT ‘‘normal’’ securitization
6

7. Policy Implications
 Regulate ‘‘dangerous’’ shadow banking…
– Consolidation standards
– Constant-value mutual funds
 … but foster non-bank credit channels
– Remove regulatory barriers
 e.g. loan eligibility in UCITS funds
 e.g. independent leasing companies
 …
– Insolvency legislation
– Competition policy
– Transparency & disclosure
– Public discourse / culture
7

8. 8
Thank You for your Attention
Nicolas Véron
+32 473 815 372 (Europe) / +1 202 550 0614 (USA)
n.veron@bruegel.org / nveron@piie.com
Bruegel: www.bruegel.org
Peterson Institute for International Economics: www.piie.com