Survey says Basel III forcing banks to more carefully size-up borrowers; but for borrowers the feeling is mutual.
Due to Basel III reserve requirements Europe’s banks are taking a closer look at who they lend money to and how. But for borrowers with a sharp eye toward counterparty risk, the feeling is mutual.
According to the results of a recently released Greenwich Associates 2011 European Corporate Finance Study, European banks aiming to meet Basel regulations “are conducting bottom-up reviews of how, when and with which clients they deploy balance sheets.” This process likely will have “significant repercussions for corporate borrowers,” Greenwich said. Basel III guidelines have set tough bank capital and liquidity standards and also require banks to significantly increase the amount of capital they hold in reserve.
The interesting thing is that corporate borrowers are sizing up banks in much the same way. US corporations continue to assess bank counterparty risk at an increased rate, in many cases using CSAs as a tool for managing future risk exposure. When used in conjunction with ratings-based triggers in a CSA agreement, FSA-regulated banks can potentially assume a two-notch downgrade, which can have a big impact on pricing.
There continue to be both short- and long-term risks associated with Europe; as such they have “fundamentally changed how we see credit,” said one banker at a recent NeuGroup Treasurers’ Group of Thirty (T30) meeting. “The conversation has moved away from the impact the market has on the cost of credit, to more about what is the next credit story and how will it impact counterparty risk.”
Still, realizing they have to do business with banks in Europe, many companies have developed formalized counterparty risk assessment programs. One member of the T30 has a program structured such that it measures risk in three categories: CDS/Equity, debt spread and static data. Each bank is weighted within each category and then across the total category to arrive at a total weighted score. Totals then are divided into a green-yellow-red scorecard analysis that is reviewed on a bi-weekly basis so that the company can stay on top of signs of imminent counterparty problems.
But at the same time they develop these metrics, many companies might not need the financing anyway. “Many of Europe’s large companies are cash rich and not in a hurry to make expansionary investments,” said Greenwich Associates consultant John Colon. “As a result, most companies to date have experienced little or no trouble in securing enough credit to meet their very moderate levels of demand.” Mr. Colon added that despite this, there remain signs that credit conditions starting to tighten “in response to pressures facing the banks, and there is virtual certainty that bank lending practices will change substantially with Basel III and other new rules.” With that in mind, companies should prepare for tighter credit, “even if their current credit needs are being fully met,” Mr. Colon said.
Overall, according to the Greenwich survey, companies have little need for financing at the moment. Approximately 85 percent of large European companies say their demand for funding for capital expenditures has remained unchanged from the relatively depressed levels of 2010, according to the survey results.