Banks may struggle to raise funds from insurers due to a conflict between Basel III rules for lenders and Solvency II regulation for insurers, Prudential Plc Chief Executive Officer Tidjane Thiam said.
"The inconsistencies between Solvency II and Basel III are a major issue," Thiam, 50, said today at a panel discussion with JPMorgan Chase & Co. CEO Jamie Dimon and UBS AG Chairman Axel Weber at the World Economic Forum in Davos, Switzerland. "Who's going to provide capital to the banks?"
Basel III's liquidity rules mean European banks may need to raise as much as 2.3 trillion euros ($3.1 trillion) in long-term funding, New York-based McKinsey & Co. said in 2010. Insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds under the European Union's Solvency II rules, which makes them more expensive to hold.
"At a high level they want banks to have more capital and you know who owns the banks -- it's us," said Thiam, who leads the U.K.'s biggest insurer by market value. "Solvency II, which is our own solvency regime, says that we cannot invest in banks. I've made the point here to many regulators: How does that work?"
Basel III, due to be implemented in 2019, proposes requiring banks to hold enough cash or liquid assets to meet liabilities for a year. The aim is to wean banks off the short- term funding from other lenders that dried up during the crisis and sent Lehman Brothers Holdings Inc. into bankruptcy. To meet this requirement, banks may have to sell long-dated bonds, which are currently bought by insurers.
Meanwhile, the EU's Solvency II regulations, which may not come into force before 2016, make holding long-dated corporate bonds more costly. They may be prohibitively expensive for insurers, Thiam said.
"Right now we see an environment where the debate is very confused," he said. "Things are going in all directions."
To encourage better collaboration between regulators and insurers, the Bank of England, which will take over responsibility for financial regulation in the U.K. this year, is discussing an exchange of employees with the insurance industry, Thiam said.
The Association of British Insurers "is working closely with the Bank of England to organize a swap of staff," he said. "They all agree that that is desirable. It doesn't matter how smart people are, there's no substitute for first-hand experience."