By Joseph Neu
Whether or not you believe that the latest plan to deal with Greece (and its sovereign debt held by banks) has put an end to the euro crisis (please don’t), the ramifications for global banks is becoming clear. If the 2008 crisis forced regulators to respond with stricter capital and liquidity rules (see Basel III et al), the 2011 euro crisis is forcing large global banks to implement them almost immediately.
On the capital side at least, market pressures are forcing global banks to implement Basel III capital rules by January 1, 2013, rather than starting them and phasing them in through 2018. This means that all the lines of business that become difficult under Basel III are more likely to be shut down, or curbed dramatically, rather than allowed to evolve and find an effective equilibrium over a six-year Basel III phase in.
And just wait until the timeline for the liquidity rules, which make many more bank business lines difficult, gets accelerated.
Not just European Banks
European banks made vulnerable by the euro crisis have been quickest to promise full compliance with Basel III capital rules (meaning the Tier 1 common objective of 4.5 percent of risk weighted assets after deductions, plus the 2.5 percent capital conservation buffer; and more) by January 2013.
They have also been pinched by dollar liquidity issues, given the pullback by US money market funds unwilling to take their funding risk and the knock-on effects of rising collateralized funding costs in dollars.
But they will not be alone. US banks, which still are waiting on US regulators to propose final Basel III application and implementation timelines, are also being pressured by market participants’ counterparty risk concerns (and CDS spread indicators) to follow suit. Asian, including Chinese bank regulators, meanwhile, are set to introduce more aggressive implementation timelines, which will only add to the market push.
Accordingly, this means that what many treasurers have seen or heard about European banks pulling back from longer-term (especially funded) credit commitments, the changes in pricing, the up-front fees and collateral demands, will not be limited to their European bank partners—at least not for long. In other words, all the scary stories about what Basel III will do to your bank relationships, that were unlikely to materialize in the very near future, are something you should be preparing to deal with now.
Bank offerings being curbed
The most mission-critical of bank offerings in line to be curbed or purged (again, starting with, but not limited to European banks) is funded credit facilities. If you need bank credit lines to run your business, your business is in trouble. This is especially troubling for Europe, where some 60 percent to 70 percent of firms rely on bank credit as opposed to capital market funding. They will need to figure out how to fund via capital markets quick, and European capital markets will need to accelerate development on the corporate side, despite the current sovereign bond turmoil.
Investment-grade US and European MNCs already well-diversified in their funding, meanwhile, will find access and pricing impacts less dramatic. Still, care should be given to pursue facilities that will stay undrawn, with documentation language to match, since pricing and availability for funded facilities will be dramatically different.
Next in line may be the willingness to trade without posting collateral. Pricing credit on your actual or potential wallet with the bank will no longer fly in an increasing number of areas. If you want to novate a trade to manage your settlement risk, for example, you better have a two-way collateral agreement in place with your trading banks.
Aircraft leasing may no longer be a line of business that European banks will be eager to support. That’s because it won’t make sense for banks that no longer have access to cheap short-term dollars to lend long. Ditto for project finance and other forms of export and trade-related bank financing.
And this is just the start of a growing list of financial services banks may well need to drop. In time, non-banks and even some smart banks, will figure out how to step in or step back in, as the case may be. But what will do you do in the meantime?