The Basle Committee’s proposal would limit leverage, affect availability of credit.
The corporate loan market this year saw its lowest volume in over a decade. The $74 billion raised was less than half the amount seen in 2008, according to S&P Leveraged Commentary & Data. But treasurers in The NeuGroup’s peer discussions have reported that terms are, in fact, beginning to ease and credit is becoming more widely available. However, those hoping the economic rebound will turn this trickle into a flood may have to temper their optimism. International regulators have floated new rules that could force banks to remain relatively parsimonious, even in good economic times.
On December 17, the Basle Committee on Banking Supervision issued a consultation paper for these bank capital and liquidity rules. It proposes that banks be banned from granting bonuses if their capital levels fall below a certain level. It would also exclude hybrids from banks’ Tier One capital. If implemented—and the BIS’s timetable would see it phased in by 2012—this would provide a significant limit on bank leverage.
Further, it seeks to redress the dangerously procyclical aspect of the current capital rules, which force banks to cut lending in bad times, and allows them to leverage themselves sky-high during booms. The Basle Committee wants to force banks to pile on additional capital during good economic times to act as a cushion against downturns. Requiring banks to stockpile more dry powder seems intelligent in light of the capital crises during the financial meltdown. But between that, the exclusion of hybrids from core capital and the de facto leverage limit that the bonus rule would represent, corporate treasurers may find the cost, terms and availability of credit do not return to the gung-ho levels seen before the crisis.
The Basle Committee wants to force banks to pile on additional capital during good economic times to act as a cushion against downturns. Requiring banks to stockpile more dry powder seems intelligent in light of the capital crises during the financial meltdown. But between that, the exclusion of hybrids from core capital and the de facto leverage limit that the bonus rule would represent, corporate treasurers may find the cost, terms and availability of credit do not return to the gung-ho levels seen before the crisis.