Risk Annual Summit: Loan and bond markets will suffer under Basel III, say panellists

Supervisors should embrace new form of securitisation to encourage bank lending, argues Ernst & Young’s Patricia Jackson


Panellists at the Risk Annual Summit in London today expressed fears that regulators have not grasped the full impact of the Basel III reform package – in particular its two new liquidity measures, the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), which they argued could hurt bank lending and restrict the market for bank debt issuance.

For Patricia Jackson, head of prudential advisory at Ernst & Young and a former member of the Basel Committee on Banking Supervision, the biggest worry is the impact on lending. "Big clamps have been placed around the balance sheets of banks – things such as the liquidity ratio, the net stable funding ratio, the new capital levels. Banks will not be able to concertina their balance sheets to pick up the need for new lending. I think there are issues around the costs now of achieving these new levels," she said.

As a solution, Jackson suggested regulators seek to reinvent the securitisation market, which she argued could kill two birds with one stone – encouraging credit growth while also becoming a new source of the liquid assets needed to satisfy the LCR.

"The only thing that squares this circle is to get a very, very high-quality, simple form of securitisation going again. I think that would take a lot of push from the regulators. It would have to be a different sort of vehicle than what we've seen in the past. It would have to be completely transparent. The authorities could offer the carrot that it would go into the new liquidity pools and be eligible as collateral with central counterparties," she said.

Recognising these new securitisations as eligible assets for the LCR, which is due to be implemented in 2015, could be a real fillip. The LCR aims to ensure banks have enough liquid assets to cover expected outflows during a 30-day period of stress, but the industry has consistently argued the current list of eligible assets, dominated by sovereign bonds and cash, is too restrictive.

banks will not be able to concertina their balance sheets to pick up the need for new lending. I think there are issues around the costs now of achieving these new levels

Bill Rickard, a fellow panellist at the event and head of regulatory development at the Royal Bank of Scotland's group treasury in London, was scathing about the basic set-up of the measure. "The LCR is probably one of the most dangerous metrics when taken on its own. First of all, the LCR is meant to cover liquid assets over a one-month horizon. Clearly, there is no use being liquid over 30 days if you've gone bust on day one. Just meeting the LCR is not a very good guide to a bank's liquidity position," he said.

There are also problems with the NSFR, which is set to come online by 2018. The measure aims to eliminate funding mismatches by establishing a minimum required amount of stable funding based on the liquidity characteristics of a firm's assets and activities over a one-year horizon. That could encourage banks to issue large amounts of long-term debt, but the market for such debt might be damaged by separate rules on bank resolution regimes, in which some bonds will need to contain so-called bail-in provisions – clauses that write down the value of debt if a bank is in distress.

"I think we need to preserve the sanctity of the unsecured debt market, and there needs to be a clear definition of what is a capital instrument and what is a senior debt instrument, because the holders of those instruments enter into those transactions with different ideals," said panellist Russell Deyell, head of group capital management at Lloyds Banking Group. "Personally, I don't think the proposals for senior debt bail-in do the market any favours."


The April issue of Risk magazine will include a feature looking in depth at the potential conflict between bail-in plans and the NSFR.

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