Stormy Seas: Forecast for Regulatory Weather
Capital is as capital does. That seems to be an emerging wisdom as we approach the 4-year anniversary of the Lehman bankruptcy. That, and the knowledge that regulation, ever-changing, will yet be constant in its presence with us, and with IT the regulators.
So, let’s parse it out: capital is perceived to be positive as a risk mitigant (regulatory minimum capital thresholds), and is only as helpful to the general populace as what it does: enable growth through loans. We still hear complaints about tight credit, and indeed this does seem to be a problem for the consumer at least in the mortgage arena (add stats).
Many of the financial institutions around the world have visited the capital markets numerous times in the last 4 years. The results have been varied, and our view is that the playing field is far from level. For borrowers, this means knowing your banks is at least as critical now as it ever was (more on that elsewhere). For bankers, it means that differences in appetites and return thresholds will continue to create both capacity and pricing differentials that we have not seen in a while.
Here in the US, the banks and borrowers are sheltered by the US-based financial institutions’ relative strength post 2008. Many have fully repaid the TARP loans and are actively lending with strong appetite. The many smaller regional banks that still have TARP ties are, we suspect, likely to be slowly consolidated as the market can absorb them. The most troubled have to a large extent been closed/subsumed with FDIC processes during the last 4 years.
With respect to Europe, the implications of Basel 3, and the requirements around additional liquidity to back up risk capital will become more than nettlesome to some US-based borrowers with multi-national banks and needs. Indeed, we are already seeing banks back away from commitments to long-time borrowers because of difficulties with dollar-funding, length of commitment, or strategic retrenchment to home-market focus.
The outlook, we believe, is for more regulation, and more regulators, and more regulatory confusion as various governments grapple with the “appropriate” levels of capital required to offset huge piles of risk assets.