21 March 2012

Risk.net: Loan and bond markets will suffer under Basel III

Basel III rules, particularly ratios for net stable funding and liquidity coverage, could hit bank lending and the bond market, panellists said at the recent Risk Annual Summit. Patricia Jackson, former BCBS member, said the main concern is how the rules will affect lending.

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

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