Financial markets in times of global megatrends

With financial support from the Capital Markets Union Foundation Project, the Cologne Institute for Economic Research (IW Köln) published the study "Financial markets in times of global megatrends: What regulatory reforms are needed so that the financial markets can best support the real economy during structural change?" on 8 November 2023. 

The study systematically analyses the financing structure of the German economy. It focusses on the financing of structural change in the area of conflict with the challenges of financial market regulation, in particular "Basel IV" and sustainable finance. The study argues in favour of systematically strengthening bank-based financing in order to be able to finance the entire German economy during its transformation. 
 

Results of the study

The German economy is facing various challenges, including increased corporate debt as a result of the COVID-19 pandemic, higher commodity prices and an energy crisis, which have led to existential cost pressure. These developments have led to a deterioration in credit ratings and threaten to block new lending. At the same time, the megatrends of digitalisation, decarbonisation, demographics and de-globalisation require investment in new technologies that are not yet ready for the market in order to secure long-term competitiveness. However, the ongoing implementation of banking regulation in particular, which requires an increase in equity ratios and a reduction in risk assets, is having a counterproductive effect. Digitalisation and decarbonisation are reducing the value of conventional assets, which is leading to adjustments in portfolios and a revaluation of loan collateral. In addition, regulatory pressure is being exerted to reduce the financing of CO2 emissions.

In order to successfully manage the structural change, bold reforms are needed, in particular the strengthening of synthetic balance sheet securitisations to free up equity in banking. Furthermore, a reduction in bureaucracy and a pro-growth policy approach is needed, including tax incentives for research and development and the introduction of super depreciation to encourage investment. These measures should help to finance the entire economy and enable companies to focus on sustainable growth.