Author: Denise Bedell

SIBOS 2011— REGULATION

By Denise Bedell

Companies—and their banks—are increasingly mindful of how regulatory changes, such as the introduction of Basel III, will affect their corporate banking activities and the cost of banking services.

Wholesale banking activities—in particular, straight lending—are being affected by several regulatory changes, such as the Dodd-Frank Act and Basel III. New capital requirements will undoubtedly restrict or reduce bank lending, and banks will focus more on their key clients as a result. The cost of capital will rise, and companies will once again be looking to improve their liquidity management and adjusting to a new norm in terms of the lending environment.

"The cost to banks of new capital requirements is significant, and it will drive up the cost of lending"

"Consequently, they will charge more for loans, even to their best customers" Mark Webster, Treasury Alliance Group

Gareth Lodge, a senior analyst at consultancy Celent, believes this is creating uncertainty over the implementation and the unintended consequences. One thing is clear, however: The increased capital requirements will drive costs up and banks will have to charge more to cover their increased cost of capital. For major banks that could be quite significant.

Mark Webster, a partner at consultant Treasury Alliance Group, says that new capital requirements could see banks holding as much as 8% or 9% in Tier 1 capital. “The cost of that is not negligible, and it will drive up the cost of lending.” At the same time, banks will have to look more closely at risk and be more restrictive about who they lend to. Webster says: “Consequently, they will charge more for loans, even to their best customers.”

Andreas Bohn, head of asset and liability management, global transaction banking, Deutsche Bank, notes: “There is a stronger distinction between short-term and long-term lending.” He says that lending for longer than a year requires banks to maintain a higher proportion of stable funding, so lending will tighten as a result. Short-term trade finance loans should see less of an impact.

Questions Remain

How trade finance is viewed under Basel III is still in question. The fear is that trade finance will be 100% risk-weighted and be treated the same as on-balance-sheet financing. How that plays out will be closely watched as the summer progresses and the Basel Committee provides greater clarity on the issue.

The increased reserves will effectively set a limit to how much banks can leverage their balance sheets, which will lower credit, market and liquidity risks but also negatively affect the ability of banks to generate profit. “This would suggest that banks will need to rely on those business lines that generate fees—for example, cash management—or pay less for their retail deposits, if possible,” says John Jay, senior analyst at consultancy Aite Group.

“Unless corporate clients can access the capital markets directly for their financing needs, they will continue to need bank financing services and may therefore remain captive clients to an expected increasing cost structure,” Jay says. “It is not inconceivable that banks will exit corporate banking business lines if those business lines do not meet minimum profitability targets.”

Bohn at Deutsche Bank agrees. He cites interbank wholesale funding, which will likely play a lesser role going forward, while clearing, cash management and custody activity will grow in importance as they are seen as more stable sources of funding. Bohn says: “It is probable that we will see greater competition in this area.”

alt Special Report : Sibos 2011