Financing for Investment
Remarks by Angel Gurría, OECD Secretary-General, delivered at the G20 Finance Ministers and Central Bank Governors Meeting
Washington, Friday 19th April 2013
(As prepared for delivery)
Ladies and Gentlemen,
As I highlighted yesterday night at our dinner on the state of the global economy, we are witnessing an increasingly worrying disconnect between buoyant financial markets on the one hand and a stubbornly weak real economy leading to uncertain prospects for companies, and enduring economic hardship for people. Investment by corporations is undoubtedly held back by gloomy growth prospects but also by difficulties in accessing long term financing, notably banking credit which remains anemic.
How can the financial system as a whole be redirected towards the financing of the real economy, towards financing for long-term and productive investment in particular?
These are the critical issues that are being currently discussed in the newly established G20 Study group on Financing for Investment to which the OECD is proud to be contributing.
I would like to outline what could be a three-pronged G20 strategy aimed at unlocking financing for long term investment.
First, let me insist, again, on the critical importance of reforming the business model of banks to restore their financial intermediation role. Despite efforts by the G20, many large banks’ business models have not changed enough compared to the pre-crisis era. Overall, they are still highly leveraged and new products such as Exchange Traded Funds (ETFs), and high-yield products and trading are at the forefront of their current business strategies. These developments call for the completion of the financial reform agenda, starting with the separation and ring-fencing of banks’ activities, as we first proposed at the G-20 Summit in 2009. The separation of commercial banking from large-scale proprietary securities businesses, notably in derivatives, remains essential to avoid the cross-subsidization of excessive risk-taking linked to the too-big-to-fail phenomenon.
Policymakers should also aim at restoring the role of public equity markets as a source of long-term investment financing. Public equity markets have declined as a destination for high-growth companies with a strong potential for job creation. Across the globe, the number of IPOs has fallen by half over the last decade compared to the previous one. This trend risks being compounded by the rise in the cost of equity capital vis-à-vis debt financing which may work against long term real investment. The OECD is currently working at identifying the barriers to the use of public equity markets and will suggest ways in which stock markets could better serve the needs of the real economy. This work could make a useful contribution to G20 work on financing for investment.
We need to restore the traditional financing role of banks and equity markets, but we should also consider, in parallel, tapping and unleashing new and alternative source of long term financing, such as the growing pools of assets held by institutional investors - pension funds, SWFs and insurers. Institutional investors are holding around USD 80 trillion in assets; but less than 1% of institutional investors’ assets are invested in infrastructure projects for instance. This is the reason why you mandated the OECD to deliver a report on the “High Level Principles of Long-Term Investment Financing by Institutional Investors” by the Leaders` Summit in St Petersburg. The definition of these principles is underway. They will address impediments to long-term investment by institutional investors such as governance, prudential regulation, valuation and tax treatment, the design of adequate financing vehicles and investment restrictions.
We are looking forward to delivering these principles and we are convening jointly with the Russian Presidency a G20/OECD High-Level Roundtable on Institutional Investors and Long-Term Investment to be held on 28 May 2013 at the OECD Conference Centre in Paris. The event will provide key inputs into the development of the Principles requested by G20 members.