Lighter rules to lift lending
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

Lighter rules to lift lending

Regulation forcing up the cost of borrowing has been eased and delayed. With loan volumes low and banks’ lending capacity high, now is the time for companies to consider loan financing. Pippa Crawford, Head of Loan Capital Markets EMEA at RBS, explains.

Pippa Crawford, Head of Loan Capital Markets EMEA, RBS

New rules on bank liquidity buffers – part of the Basel III regulation to ensure banks have enough assets in reserve to withstand shocks to the economy – were expected to significantly raise the cost of borrowing. But changes announced by the Basel Committee on Banking Supervision in January mean those rules will now be phased in from 2015, rather than introduced in full that year, and at a lower level than expected.

Full compliance with the new rules will not be required until 2019, although it is widely believed that banks may still comply ahead of this date.

This eases the pressure on upward pricing and enhances the attractiveness of a loan market that is already offering good rates. With relatively low levels of demand for loans and enough bank liquidity in place, the vast majority of corporate loan deals are either fully or over-subscribed.

Businesses have been reluctant to borrow during the crisis, preferring to ‘batten down the hatches’ and focus on their existing liabilities. That means banks have capital to put to work and they will want to be as competitive as possible on terms when lending it.

Astute companies are therefore expected to access the loan market now to take full advantage of optimal pricing conditions.

They could also look to refinance existing loans, even if they don’t have to until after the changes are introduced, to take full advantage of current market conditions.

Basel III requires banks – through the so-called Liquidity Coverage Ratio (LCR) – to hold enough unencumbered, high quality assets, like UK government gilts and certain corporate bonds, to meet the amount of cash they would expect to have to lend or return over 30 days should the economy come under stress.

The main changes affect liquidity loan facilities, which tend to be unused, rather than credit loan facilities which are expected to be drawn in some shape or form when they are put in place.

These are facilities for refinancing other forms of a borrower’s debt, giving them access to bank support when alternative forms of funding are not available. The most commonly cited example of a liquidity facility is a standby facility that backs up a company’s commercial paper programme.

For these types of loan, the regulation previously assumed that companies would make complete use of – or draw down on – their committed but undrawn facilities, borrowing the money available to them to tide them over during times of stress.

This of course means that banks would need a significant liquidity buffer to provide those facilities in the first place – they have to buy and borrow this stockpile of reserve assets.

Fortunately, January’s revised rules reduced the size of this buffer because the use of such liquidity loan facilities are one of a number of actions a company could take in times of stress. The regulation now assumes non-financial corporates would only take out 30 per cent as opposed to all of it.

In terms of timing, the Basel Committee has said that the LCR will still be introduced in 2015, but it will now be phased in.

If we wind the clock forward to 2015, banks will need to have liquidity buffers for 60 per cent of the assumed 30 per cent for corporate liquidity facilities. This will rise gradually over the following years and reach 100 per cent (of the assumed 30 per cent) in 2019.

The crux of the matter is that banks initially had to have enough liquidity to cover a 100 per cent draw down on their liquidity loan facilities in 2015 but they now need to cover just 18 per cent that year (60 per cent of the 30 per cent).

It is good news for the loan market and a victory for constructive debate with regulators. The revised regulation still needs to be adopted by local regulators but all expectations are that these changes will stand.

The rules for credit facilities, such as a standard general corporate purposes revolving facility, are unchanged with an outflow assumption of 10 per cent.

Regulatory compliance will still put pressure on banks to raise the cost of borrowing – and of course the liquidity coverage ratio is just one of a myriad of regulatory changes facing banks.

The costs of this regulatory change will have to be passed on to customers eventually but building up the buffers over time, alongside the phased introduction of the regulation, means any price rises will happen incrementally.

January’s Basel III update means we are not going to see any sweeping changes straight away, and when they do kick in they will be far less severe than initially expected. With banks sitting on enough liquidity to lend, now is the time for companies to access the loan markets.

The announcement was good news for banks and businesses. It should help to give the loan market a much-needed boost and get money moving around the economy once again. 

For more RBS Insight content, click here

Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc, The Royal Bank of Scotland N.V or an affiliated entity (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed. RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.

The Royal Bank of Scotland N.V., incorporated in the Netherlands with limited liability. Registered with the Chamber of Commerce in The Netherlands, No. 33002587.

The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.

Gift this article