Basel Committee and friends weigh in on the long-term economic impact of executing capital and liquidity proposals.
The Basel Committee and the Financial Stability Board recently released their assessments of what impact implementing Basel III would have on the global economy. As one would expect of such reports, they are supportive of the measures and feel that teased out over a four-year period, the rules will have minimal impact on GDP and lead to a workable increase in lending costs.That is, taken in isolation.
Whatever banks feel about the rules – generally they oppose them and feel they will weaken the economic recovery – treasurers should pay close attention. That’s because if there ends up being a negative consequence for the global economy as a whole this will impact their companies, but there will also be a knock-on effect for the direct impact on their bank relationships: banks tightening credit, raising and tacking on more fees, exiting from transaction or servces and otherwise restricting access to the credit markets.
Downplaying the macro impact
The Basel Committee’s assessment, An assessment of the long-term economic impact of stronger capital and liquidity requirements, posits that “there are clear net long term economic benefits from increasing the minimum capital and liquidity requirements from their current levels in order to raise the safety and soundness of the global banking system.” In fact, they feel those requirements could be increased even further if necessary. “There is considerable scope to increase capital and liquidity standards while yielding positive net benefits,” the report said.
The FSB, which is a conglomeration of European supervisory agencies and partnered with the Basel Committee, said in its report, Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements, that “for each percentage point increase in the target capital ratio implemented over a four-year horizon, the level of GDP relative to the baseline path declines by a maximum of about 0.19%.” Banks’ lending rates, it said, “would amount to about 15 basis points for each percentage point increase in capital.” The report said that the worst of GDP impact will be 4.5 years after implementation, after which it recovers while the lending costs will disappear after implantation is complete.
Incremental adversity
However implementation plays out, treasury should be on notice that this and other looming issues in the financial sector collectively might cause greater adversity. This makes it more difficult to know the the tipping point causing even a company’s best relationship bank to suddenly stop taking its calls. In addition to Basel III and the just-passed Finreg, other bumps in the road (and on bank balance sheets) remain. For instance, government-owned finance agencies Fannie Mae and Freddie Mac are pushing hard for banks to buy back bad mortgage loans that they deemed were sold under false pretenses – i.e., lies – by either lenders or borrowers. Fitch, the ratings agency, warned recently that some of the largest US banks – including BofA, Citigroup, JPMorgan Chase and Wells Fargo – may end up having to repurchases loans totaling about $180 billion.
Also, in Europe, EU regulators are contemplating stress tests for European banks as an ongoing exercise. Recently, Olli Rehn, the EU commissioner for economic and monetary affairs, told Bloomberg Television that the EU is considering repeating the bank stress tests it conducted in July. The goal is to restore confidence in the banking sector. In the July tests, 91 banks passed while 7 failed. Nonetheless, the tests were criticized for being too easy and with many suspecting tested banks as having way more bad loans on their balance sheets. An ongoing testing regime is likely to result in more conservative lending going forward.
Taken all together, it means that treasury needs to continually shore up its bank management, while factoring in the cumulative effects of all that’s impacting them, to make sure access to needed credit and services is there when needed and marshal internal cash as a contingency for when it is not. (see related story here).