Speech by Mario la Torre at the Interparliamentary Conference Rome, 29-30 September 2014

The session on Banking Union and Real Economy will be introduced by a welcome of the Vice-President of the European Parliament, Olli Rehn, and four eminent guest speakers: Ignazio Visco – Governor of the Central Bank of Italy – Dario Scannapieco – Vice president at European Investment Bank – Nicolas Verron – senior fellow at Breugel Research Institute for economic issues and visiting fellow at the Peterson Institute for International Economics in Washington – and Mario La Torre – full professor at the University of Rome La Sapienza. The debate will follow their speeches.

Report: start 56.44 – end 1.09.34

Mario La Torre – full professor at the University of Rome La Sapienza.

Thank you Mr President, and honorable members of the Parliaments. It is very important to bring to the attention of today’s debate an issue such as inclusive finance, which deserves space also because of the strong and pronounced social dimension of the new economic policies at the European level. It is important because inclusive finance – in particular I will focus on microcredit and impact finance – can become an important tool to strengthen the social dimension of the EU policies, and also because its instruments can be seen as operational tools useful to solve the “short-circuit” that we have mentioned several times, both yesterday and today: the need to foster investments on the one hand; the constraints of the fiscal compact on the other hand.
Thank you Mr President, and honorable members of the Parliaments. It is very important to bring to the attention of today’s debate an issue such as inclusive finance, which deserves space also because of the strong and pronounced social dimension of the new economic policies at the European level. It is important because inclusive finance – in particular I will focus on microcredit and impact finance – can become an important tool to strengthen the social dimension of the EU policies, and also because its instruments can be seen as operational tools useful to solve the “short-circuit” that we have mentioned several times, both yesterday and today: the need to foster investments on the one hand; the constraints of the fiscal compact on the other hand.
I think it is also useful because inclusive finance may bring the flavour of the economics of welfare and happiness.
I love a lot more those economists defined by the Nobel Prize winner Buchanan as “economists with immagination” if compared to the “scientistic economists”. “Economists with imagination” are not the ones that strive to achieve their impossible fancies, but simply those who remember that the economic rules are conventions established by men, not irrevocable laws of nature.

I’ll try to explain how microcredit and impact finance are practical means to achieve these three objectives starting from a very simple observation: microcredit is a credit of a small amount for financially or socially excluded people; therefore, as such, it exerts its function on the credit market. It does so most fully, and even more so, during the periods of restrictive monetary policy. However, there is one important element that connects the microcredit with economic growth and it is of a qualitative nature. Therefore, it is not only about the classic transmission mechanism: credit, income generation and employment. But it is also about the fact that these loans are dedicated to those who generally have no access to traditional financial systems; therefore, it is a tool that not only has the potential to simply boost the growth but it has the potential to boost sustainable growth because it promotes equitable distribution of wealth and also an equitable distribution of job opportunities. A recent survey of the Italian National Agency for Microcredit on microcredits granted in Italy resulted in the estimation of a theoretical multiplier of job creation at 2.43. It is not a striking number but is important enough to start a discussion.

Then there is a dimension linking microcredit to economic growth that is less explored and less known. A couple of weeks ago we presented here in Parliament the Report of the Taskforce on social impact investments established by the G7 countries, of which I have the honour to be the Italian government representative. The Report clarifies and demonstrates how impact finance can become an essential tool to solve the short-circuit generated by the need of funding and the constraints of fiscal compact. By “impact investing” we intend the finance that supports investments with social and environmental impact, offering, at the same time, a financial return to investors; this is based on public-private partnerships structured for the benefit of both private investors and governments. Why? Because the return offered to private investors who fund projects is linked to the achievement of social objectives. In this way, the governments promote investments, mainly in the areas of welfare system, but has no outflows; at the same time, from the economic point of view, the return offered to private investors is part of the savings on public expenditure which is obtained with the achievement of the social goal.

Microcredit is a tool that can be used within the architecture of the impact finance and thus, at the same time, it takes on an additional dimension when compared to its traditional function on the credit market; this dimension more easily solves the short circuit between boosting and providing support to investments and fiscal compact constraints.
If it is so, and there is other data to support the point that I do not have time now to bring to your attention, it might be worth reflecting on what may be the policy actions that could be taken up to support the microcredit and the impact finance market and to support the inclusive finance in general.

I will narrow the actions to three levels: regulatory actions, actions concerning the tools and actions regarding the governance of the market. In all, in the document I have made available to all of you, you will find fifteen policy recommendations spread over these three levels; obviously, I can present you only selected examples. From the regulatory point of view it is worth recalling the 2007 Communication of the European Commission, and the invitation to Member States to create friendly environments to microcredit. And yet, as of today, in Europe, few countries, among which France, Romania and Italy, have passed a law on microcredit. Italy, however, is still waiting for the approval of the decrees. And therefore, I believe that the Commission’s invitation should be reiterated to the Member States and I invite you to reflect on the issue and share your reflections during your national forums. It is also true that this regulatory framework for microfinance should go parallel with the process of harmonisation at European level, in order to ensure a level playing field among the intermediaries, also as regards the form of access to the European funds earmarked for these areas of market.

The second important element of the regulatory approach concerns prudential regulation. I will not go into detail, but certainly, as regards prudential regulation concerning both the microcredit institutions and social enterprises dedicated to microcredit, as well as the regulatory requirements of Basel II and III applying to banks and financial intermediaries willing to enter in these markets, the application of the principle of better regulation is not an easy task, but it is needed and not yet reached.

And one last important aspect that relates to fiscal policies. When trying to boost investments one always refers to tax incentives and these are always at odds with budget constraints. That is where the philosophy of the impact investing can also be helpful. It is necessary to rethink the policy of tax incentives as not linked to investments but to the achievement of social goals. In such a case, we deal with “compensatory fiscal policy”.
When it comes to recommendations concerning operational tools, it is evident that the main issue is the need to catalyse increased funding for these markets. I would like to share only two points. The first one, more traditional but equally necessary, is to promote guarantee funds and, above all, to use public funds as leverage for private investments. In this regard Italy has approved a law that extended its national guarantee fund for small and medium-sized enterprises to microcredit loans; this can also be a model at European level. But let me throw my heart over the bar, thinking about what role could the government play on the capital market. Why not issue “government social bonds” that would be government bonds having as underlying assets microcredit projects and investment projects with social impact. These bonds could become eligible asset class in the monetary policy operations, or they could be acquired by the European Central Bank in accordance to the announced scheme, or could somehow seen as a pilot test for the Euro Union Bond.

Finally, a few comments on the governance of the market. It is clear that all the aforementioned actions, and others, need a well-defined strategic plan. Microcredit institutions and social enterprises operating in the impact investing are usually rather small businesses, and therefore in order to help them it is necessary to catalyse funds and seek to build up aggregation processes. It is necessary, in my view, to imagine incentives to national aggregators which may also take the function of “national certifying entity” of the ex ante evaluation of European funds which is an activity specifically provided for in the EU programming of 2014-2020. Moreover, in the microcredit market there are already examples of national aggregator, like the APEXs in developing countries, and therefore we do not need to go far in history to find possible solutions. In Italy some of the functions that have been assigned to the National Agency for Microcredit and the recent functions assigned to the Cassa Depositi e Prestiti are the signs of having taken steps in this direction.

And my final consideration is on the ongoing process of banking union at EU level. It may seem strange to associate this issue to microcredit and impact finance but the following issue arises. In accordance to the parameter of systemic risk, microcredit and impact finance intermediaries will obviously be supervised at the national level. And here arises the issue of identifying in every country countries the authority best suited for this activity. Let me remind you that the supervision and monitoring of microcredit is not only based on economic and financial parameters, but also on qualitative elements that generally are not subject to the activities of supervisors. Hence, the need for greater coordination and greater dialogue between national supervisors. Moreover, there is an issue that can be discussed during the following months as the Governor Visco reminded us that the process will actually take off in November: which authority at the European level will have the skills in the area of inclusive finance and microcredit in particular. The final recommendation concerns the role of the governments and member states. In the “Guide to Social Innovation” of 2013, the Commission already outlines, step by step, what the governments should do to take the role of market builder in the inclusive finance market.

I would like to end with an evocative hint, and I quote the words of a German philosopher, Martin Heideger, who said that “the most intimate part of the technique has nothing to do with the technique itself, and if the society will evolve chasing technique we will contemplate its beauty as we contemplate the beauty of a fossil”. Let’s do all it takes for Europe to avoid such a fate. Thank you.

risposta agli interventi dei parlamentari: start 2.18.53; end 2.22.30

And the last word to Prof.La Torre.

Thank you, thank you also for your comments. At this point, I must clarify that I strongly support the process of banking union and the new supervisory architecture. What worries me most is what lies underneath and many of your comments also show the same concern. Regulation on financial intermediaries, over time, has become very complex and sometimes I would even say contradictory. We continue to ask banks to grant credit but then impose new rules on liquidity. As it was reminded yesterday, banks are induced to invest in government bonds. And then we ask of monetary policy to play the role of economic policy. It is a very complex regulation. I deal with securitization since the early 90’s, in Italy the law was passed in 1999, and I remember several periods. First, securitization was not known by anyone, then it became a fashion, afterwards securitization became the cause of the crisis, and now it is back again in our every-day discussions as a possible solution. The truth is that also the rules on securitization are very complex. I confess that when the Supervisory Formula was introduced in Basel rules all academics had difficulty in understanding the algorithm and I can assure you that professionals and experts of securitization simply did not understand the formula and yet it was applied mechanically. And later, when the crisis came, we realized that the issue of securitization was the liquidity risk – the liquidity illusion which had not been estimated. It is still the key issue of securitization and derives mostly from the large concentration ratio of operators, which are active both as issuers and investors of ABSs securities.
The general issue, I believe, leads us towards the idea of simplification of the regulatory framework.

However, in my opinion, there is a structural issue: in any case, banks and traditional financial intermediaries will never be able to serve marginal groups of clients. Financially and socially excluded people will exist always. For this reason I wanted to bring your attention to the need to go parallel with a new path of inclusive finance. This structural issue not only concerns banking activity but it also regards economic policy. We cannot keep on asking the banks to finance companies that carry out projects in mature industries with declining demand; here, once again, the role of social impact investments, of social and environmental innovation can be crucial to the new economic policy. With this respect, I truly hope that the 300 billion of investments evoked by Junker so often, will take this aspect into account. Thank you.