Regulators are keen to avoid a repeat performance of the 2008 financial crisis, in which banks around the world had to be rescued with taxpayers' money, and have decided that some portion of future losses should instead be imposed on a bank's senior bondholders if the firm is close to failure. According to some estimates, the additional risk for investors in these new regimes, currently being developed in the US, UK and elsewhere in Europe, could add 100 basis points or more to bank financing costs.
If so, this pricing change could come at a bad time. Research conducted by Oliver Wyman estimates European banks will have to issue around €2.7 trillion in long-term debt to comply with Basel III's net stable funding ratio (NSFR). Set for implementation in 2018 – but still a work in progress – the new liquidity measure seeks to establish a minimum amount of stable funding for each bank, based on the liquidity of its assets over a one-year time period.
Banks have taken their concerns with the NSFR directly to the Basel Committee. "At the last Basel Committee meeting, the industry presented its concerns about the NSFR", says a regulatory expert at one European bank. "We made it clear that, although the measure is still unfinished and imperfect, banks need to start preparing for it now because many of the deals we are making at the moment will be affected by it after 2018. Soon, the markets will start judging us on our compliance with the NSFR. We need to know whether the measure will be implemented, and we need to know what it will look like if it is. The committee acknowledged our concerns, but didn't give much hint as to how it is going to resolve this problem."
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