The World Bank’s managing director, Bertrand Badre, concedes global rules to make banks safer will restrict lending for infrastructure needed to reignite economic growth.
But, in a swipe at banks hoping to have the regulations watered down, he says there is ”no way back” and the world must find new ways to fund large projects from outside the banking sector.
Speaking in Sydney on Monday, Mr Badre argued that mobilising trillions of dollars for infrastructure investment should be one of the world’s top priorities. ”If you don’t have a proper flow of credit, if you are not able to finance infrastructure properly, there is no way that global growth will come back to the way it was before the crisis,” he said.
Bank balance sheets previously played a key role in funding such projects but, he said, this would no longer be the case, because of tougher rules on bank risk-taking.
”You have to get used to a different model, a different financing model. I think that’s where we have to adapt, there is no way back,” he said. ”I don’t think you will have massive leverage of financial institutions authorised by any regulator in the near future.”
His comments highlight a key dilemma facing officials at the recent G20 meetings in Sydney.
Governments want to foster private sector investment to create jobs, and see infrastructure as critical to these goals. However, they also want tighter rules on bank risk-taking.
Senior global bankers including UBS global chairman Axel Weber and Goldman Sachs chief operating officer Gary Cohn warned that overly cautious regulations will restrict banks’ ability to lend, undermining hopes of economic recovery.
Mr Badre, a former chief financial officer of Societe Generale and Credit Agricole, said there was no turning back on finance regulation, and the world had to find new ways to fund infrastructure.
He said institutional investors such as pension funds, sovereign wealth funds and insurance companies must play a bigger part in funding infrastructure. ”Banks will be less involved with their balance sheets than they were before. Now we need to turn to the regulation of institutional investors.”
According to estimates quoted by Mr Badre, institutional investors have some US$79 trillion ($88 trillion) in assets. Governments would like to see more of this ploughed into infrastructure such as transport or green energy developments. But key institutional investors at a G20 conference last week said they still faced roadblocks, including unfavourable regulations and policy uncertainty.
Mr Badre said governments needed to make infrastructure a ”simple and attractive” asset class.
Mr Badre is the latest senior official to dismiss bank lobbying for watering down post-GFC regulation. Bank of England governor Mark Carney rejected claims the tighter rules would lead to an explosion in shadow banking, while Australian Prudential Regulation Authority chairman John Laker argued against ”turning back the clock on regulatory reform”.
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