Forecast for Regulatory Weather
The weather forecast for the foreseeable future is for increasing regulation and an attendant chill on bank lending is, in our view, and outcome that is beginning to play out. This chilling effect is evident as we turn the corner on a year (2014) that has seen a very borrower-friendly market.
Yet, in each transaction, we see the focus from the banks on regulatory action in the guise of discussion and focus on return disciplines. In certain instances the proposed regulation of leveraged transactions has become an explicit discussion point even as deals are launched. In certain instances we have needed to consider the leveraged lending guidelines carefully, in conjunction with our clients, while planning bank group invitations. Finally, we have seen early signs of portfolio culling, as banks yet again begin to address the real, if not immediate, requirements for higher levels of regulatory capital and the concomitant effects on banking relationships.
Here is what we know:
- Basel 3 is being implemented, with banks a varying stages of readiness from completely integrated to not very far along
- Higher capital and liquidity requirements are creating unequal impacts in the US and European markets as various regulators take differing views of the array of requirements
- The regulation of leveraged transactions is creating a “line in the sand” that banks and investment banks are addressing differently (more on that later)
In discussing the effects of regulation recently, the profound changes about to work their way into the infrastructure of banking were described as follows:
“We have substantially reduced the amount of risk they can take,” said Timothy Geithner, the former Treasury secretary. “We’ve cut the profitability of banking roughly in half.” NYT Dealbook, Feb. 19, 2015
And in the same article:
“You are hard-wiring a change into the banking industry,” said Mike Mayo, an outspoken bank analyst who has called for the largest banks to shrink. “When we look back 10 years from now, we are going to say the biggest impact was from capital rules.” NYT Dealbook, Feb. 19, 2015
So, as a corporate borrower, it is best to be prepared with a firm grip on your book of business with each bank, and a bench of banks in the wings in case the return disciplines create a reduction in capital available to your company.
And stay tuned…. this story has more chapters to unfold.