Europe’s planned approach to implementing the Basel III net stable funding ratio (NSFR) risks harming the economic strength of corporations, says Jean-Marc Servat, chairman of the European Association of Corporate Treasurers (EACT).
In his 24 June response to a European Commission consultation, Servat highlights the organisation’s aim under its proposed NSFR regime to make gross derivative liabilities subject to an additional 20% required stable funding (RSF) factor.
According to Servat, this would have a significant impact upon banks’ derivatives operations, requiring them to hold much greater assets for the related liabilities.
Servat writes: “The EACT supports the Commission’s efforts to enhance confidence in the banking sector and to make banks safer and more stable, as non-financial companies [NFCs] have also greatly suffered from the financial crisis and the subsequent economic downturn.
“However,” he notes, “we believe that financial regulation should be designed and implemented in a manner that does not unduly further penalise NFCs. In this respect, we are concerned by the proposed treatment of derivatives liabilities under the NSFR and its potential impact on liquidity and price.”
Servat argues that the additional 20% RSF factor would increase the cost of derivatives transactions for NFCs.
“In our view,” he points out, “banks are very likely to externalise this increase in costs as much as possible by increasing end-user prices and making NFCs pay for much of the extra regulatory cost.
“We have read industry estimates that the additional funding requirement would be in excess of €300bn across the banking sector. It goes without saying that even if only a part of this cost would be transferred to corporate end users, it would represent a major burden on the EU real economy.”
The EACT chief adds: “We would like to emphasise that the vast majority of NFCs use derivatives exclusively for mitigating the financial risk that routinely arises from their business activities.
“In order to manage financing activities and mitigate risks linked to currency, interest rate and, to a lesser extent, commodity risk, NFC end users require access to liquid and reasonably priced derivative instruments.”
Servat stresses that “punitive regulation” could end up not only increasing the cost of hedging, but constraining companies’ ability and willingness to hedge – ratcheting up market risks for corporate players.
“We do not believe this would be in line with the Commission’s priorities of supporting jobs and economic growth, and of financing the real economy,” he writes.