About private equity

How private equity invests in privately-owned businesses, supports jobs and creates prosperity.

Members

Login to access your exclusive member-only content and account information.

Login

Not a member? Join us

  • Operate to the highest level of professional standards
  • Access authoritative industry research and data
  • Navigate the complex EU regulatory environment
  • Network and engage with industry leaders
News & opinion
Opinion
Share

A time to stock up, a time to invest

23 Sep 2021

It’s time to let banks and insurance companies be both ants and cicadas.

Many young francophones once had to face a peculiar rite of passage: standing in front of a (usually very bored) classroom, they had to declaim - in verse - one of La Fontaine’s fables. Among the most famous of these moral allegories was “La Cigale et la Fourmi”, a short story describing the differences in approaches between a diligent and cautious ant and a frivolous cicada. The one spending the winter with enough to spare, the other starving after “singing all summer” – a cautious tale for children and adults alike.

The Solvency II Directive and the Capital Requirements Regulation are much more recent, much longer and much more technical texts - and they are thankfully (!) not in verse. But they share with the story a principle that can be best summarised as such: you better stock up as things will not always be as rosy as they currently are.

One year into the biggest pandemic we faced over a century, one understands better than ever the virtues of that rule and the reasons why Basel officials (in the CRR case) and the European Commission continue to expand these prudential frameworks. After all, capital requirements imposed on banks and insurers helped ensure stability at a time where stability was everyone’s top priority.  

At the same time, the parable may in its genuine simplicity ignore that only acting like an ant may not do you much good. While singing like a cicada will obviously not help you weather the next crisis (although it may remind you of sunny times near the Mediterranean), not taking any risk (or not sufficiently diversifying your portfolio) may be riskier for you over the long-term.

Solvency II and CRR delivered their objective, but they also had an impact on the ability of banks and insurers to commit long-term equity capital to businesses. This in turn made it harder for EU companies – including more innovative ones - to get the funding they need to grow...but also ultimately more difficult for institutional investors to build diversified portfolios.  

The launch of the Solvency II review today – and of the CRR framework in a few weeks – present a unique opportunity to ensure that institutional investors become key actors of the EU recovery (and a cornerstone of the EU Capital Markets Union) by giving their long-term equity exposures the risk charge they deserve. In other words: they offer the chance to keep the ant safe without muting the cicada.

And there is more good news: no fundamental overhaul and no deviation from international standards – only careful recrafting - is required to do so. In the Solvency II case, it is about making the criteria to use long-term equities portfolios more workable and suitable for insurers, for example by extending the geographic scope and improving ring-fencing requirements. In the CRR case, it is simply about not treating investments in long-term, diversified funds as speculative.

As often, this is a question of balance – as was noted by the European Commission itself when it called for these very changes as part of the EU Capital Markets Union Action Plan less than two years ago. When legislators - francophones or not - start debating the content of both legislation, they should therefore give some considerations to a successful and effective prudential framework, not only based on the stock-up efficiency, but also on the quality of the singing.

Want to discuss?

We are always keen to hear from you.

Share

What can I do to manage cookies stored on my computer or phone?

You can accept or refuse cookies. Accepting cookies is usually the best way to make sure you get the best from a website.

Most PCs automatically accept them but you can change your browser settings to restrict, block or delete cookies if you want. Each browser is different, so check the 'Help' menu of your particular browser (or your mobile phone's handset manual) to learn how to change your cookie preferences. Many browsers have universal privacy settings for you to choose from.

Help on how to set and customise your cookie settings for your browser

How to manage cookies in Internet Explorer

Cookie settings in most versions of Internet Explorer can be found by clicking the tools option and then the privacy tab.

How to manage cookies in Firefox

Cookie settings in Firefox are managed in the Options window's Privacy panel. See Options window - Privacy Panel for information on these settings.

How to manage cookies in Chrome

Click on the spanner icon on the toolbar, select settings, click the under the bonnet tab, click on content settings in the privacy section.

How to manage cookies in Opera 

You can manage cookies in Opera if you Click on settings, then Preferences, then Advanced and finally Cookies

How to manage cookies in Safari

Choose Safari, then preferences and then click security. You should then be able to specify if and when Safari should accept cookies.

To manage cookies on your mobile phone please consult your manual or handbook.

Get more help about how cookies work with specific browsers.

What happens if I don't accept cookies?

If you decline cookies, some aspects of Invest Europe site may not work on your computer or mobile phone and you may not be able to access areas you want on the website. For this reason we recommend that you accept cookies.

What happens if I delete my cookies?

If you delete all your cookies you will have to update your preferences with us again and some aspects of our site may not work.

What happens if I change computers or mobile?

If you use a different device, computer profile or browser you will have to tell us your preferences again.

If you'd like to learn more about cookies in general and how to manage them, visit aboutcookies.org.

We can't be responsible for the content of external websites.

Opt-out of cookies

Login

Join today

This is for members only. To view in full login or join Invest Europe today.