• Industry: Financial Services
  • Type: Regulatory update
  • Date: 7/16/2014

Do we know the real impact of banking regulatory reform? 

Much has been written about the impact of the regulatory change agenda on the banks. Finding the balance between financial stability and returns to the investors has been the subject of many analyst reports, academic research and other informed interventions. A lot has also been said about the need to re-establish the trust of consumers and clients and the general need for the banking industry to continue to originate credit for the market – most notably the SME sector. Less has been said about the direct impact of some of the technical change on banks business model and therefore the impact on the business relationship with their clients.

Essentially banks have historically provided the following key services to their clients:

  • Credit origination – to the whole market ranging from the largest corporate to individuals over the short, medium and longer term facilities.
  • Payments – either electronically or via other mediums to the whole market.
  • Risk management services – to the national and international corporate.
  • Liquidity, savings and investment products either as an intermediary or as a counterparty.

Observations by bank executives that “the world has changed and the relationship with our clients will change” are normally perceived by politicians and commentators as being self-serving, defensive and narrowly focused on the institutions own interest. A cursory understanding of the rules highlights the complacency of the views – we do believe that there are number of areas where the rule changes will have a direct impact on the wider economy. Key examples include:

  • Committed but undrawn facilities are one of the key influencers of corporate credit ratings and underpin business model flexibility- they generate little income for banks, but consumer considerable capital. Corporate treasurers know the importance of having these facilities in place – however they will increasingly be withdrawn as uneconomic or the cost charged will have to increase significantly.
  • Cross-border credit allows corporate treasurers to draw down facilities in different currencies and at different times, allowing corporations to manage their cash and borrowing efficiently allow. Large exposure rules and the pressure on the global branch structure used by many banks will make this more difficult. Corporates are likely to have to have individual facilities for the different countries they operate in – which will be administratively difficult and more expensive.
  • Cross-border payments have long been facilitated by the banks network of correspondent banks. With the pressure on sanctions compliance, AML and terrorist financing there is evidence that increasingly the willingness of the banks to support this infrastructure is being re-assessed because of the risk of sanctions from regulators. If these payments cannot be made there has to be a real risk that there will be a threat to global trade if corporate are not able to settle their balances with their trading partners.
  • OTC and other derivatives have provided corporate the ability to manage their risks whether interest rate, foreign exchange, commodities and many other risks. The need to post margin and collateral (which can vary if via a CCP or OTC) will have a real cost to the corporate clients – who historically do not hold significant amounts of cash or other assets suitable to posed as collateral. The fallout from the LIBOR and widely trailed FX issues are also likely to lead to pressures on corporate how use these services to manage their business.
  • Deposits and cash management have historically formed the core of the relationship between the bank and their corporate clients. Banks were able to use the liquidity to fund their book and for the corporate treasures cash management was a key part of their balance sheet management. The problem is that the Liquidity Coverage Ratio make these deposits unattractive to the banks – and they will either reduce the rates they pay or decline to take the deposits at all. As the leverage ratio become more important and a frontstop, the proposed leverage definitions mean that short term corporate deposits will become positively unattractive to banks.

Each of these points individually can be managed – but once combined they will create a real challenge to the relationship between the banks and their corporate customers. It is likely that the overall relationship will become disaggregated with individual pricing for individual transactions – and the costs of this could make a significant difference to the cost of banking. More worrying is the lack of flexibility that is likely will change investment decisions that corporates make – and this could be to the detriment of the wider economy.

Further insights

To discuss this issue further, please contact:

Giles Williams


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