Corporate treasury professionals join the Basel-bashing bandwagon
According to a recent survey by EuroFinance, approximately 60% of Western European corporate treasury professionals believe Basel III will negatively impact their company's performance.
When the Basel III regulations were first mooted, trade finance banks were particularly vocal about the impact it would have on the pricing and availability of traditional trade finance instruments such as letters of credit and bank guarantees. All sorts of gloomy scenarios were painted by the trade banks and the industry associations that represented them including Dan Taylor, president and chief operating officer, of BAFT-IFSA. He pinpointed studies suggesting that Basel III could take USD 300 billion worth of trade flow out of the picture if capital requirements are so restrictive that banks no longer see it as an attractive business.
At last year's Sibos conference in Toronto last October, Kah Chye Tan of Barclays Corporate resisted the temptation to jump on the Basel-bashing bandwagon. He said that the banks had had 20 years to get their act together when it came to Basel and being able to compile data to demonstrate to the regulators that trade finance was low risk. "We had to wait for a major sub-prime crisis to get our act together on data," he stated. "We can't keep putting the blame on Basel."
Having evaluated the impact of Basel II and Basel III in low-income countries, the Basel Committee on Banking Supervision last October decided to "waive the one-year maturity floor for certain trade finance instruments under the advanced internal ratings-based approach (AIRB) for credit risk." It also agreed to waive the "sovereign floor" for certain trade-finance related claims on banks using the standardised approach for credit risk. However, the100% credit conversion factor (CCF) in calculating the leverage ratio for contingent trade-finance exposures remained in place.
As the regulatory constraints on banks' capital continue to pile up their fear mongering appears to have spread to the corporate community. According to a recent survey of corporate treasury professionals conducted by EuroFinance, 57% of Western European corporates expect the implementation of Basel III will negatively impact their company performance. Yet, 40% of corporates, including Western European companies, indicated that Basel would have no impact. Another 61% of European corporate treasurers believe banking regulators do not understand the impact of regulation on corporates and trade finance. Even more banks (67%) indicated regulators did not understand the consequences of their actions. Western European corporates were split between those (42%) that predicted flat revenue or profit, and those (42%) that predict increased revenues and/or profit for the coming year.
"Substantial projects with reasonable to good prospects will not materialise due to banks' Tier 1 capital constraints," remarked one European corporate treasurer EuroFinance surveyed. Another commented that Basel III "will increase the cost of funds for mid and small caps, increase inflation, and destroy value in Europe."
The question remains will companies and the banking community in general have to pay the price for having "safer" banks under the Basel III capital regime. Will forcing banks to hold more capital on their balance sheets deliver the levels of "safety" regulators and politicians are looking for? Is there some other way that banks could meet the Basel III requirements without passing on the costs to their end customers?
One thing is for certain, corporates will have to reassess their traditional funding models.