But “cheap” loans may not always be the best value.
Some large international banks are already factoring Basel III’s higher capital requirements into their pricing structures. This is particularly evident in OTC derivatives, where punitive capital reserves will apply to uncleared transactions. But some large banks are raising prices or modifying collateral requirements across the board.
That may be surprising, for at least two reasons. The higher capital charges don’t kick in for several years, so banks run the risk of looking opportunistic when they hike their pricing now. And banks still do not know exactly how much capital they will be required to hold. And one thing is becoming clear, regulators are resisting heavy lobbying efforts by banks (as well as heavy criticism from J.P. Morgan CEO Jamie Dimon that Basel III is anti-American) to ease up on the rules.
One large multinational bank is preparing for the worst. Anticipating that it will be classified as a SIFI, or systemically important financial institution, the bank expects its total risk-based capital requirement to be anywhere from 10 percent up. Any loan or trade that has a tenor that brings it within the Basel III implementation period is priced on a pro rata basis to reflect the higher capital requirement, a banker at the institution explains.
Another banker at a small competitor says this gives up-and-comers looking for market share a way to undercut the more stolid, risk-averse players on pricing. But treasurers should consider the bank’s potential stability and counterparty risk when entering into a cut-rate deal. And the higher price from the proactive bank may bring with it more sophisticated structuring expertise, better aftermarket liquidity and overall better client service.
That’s not a foregone conclusion. But the sniping within the banking community over pricing, which is starting to bubble to the surface as award season gets under way, shows that this is an important topic for dealers – and so should be considered carefully by their clients.