Non-financial companies will suffer if plans from the Basel Committee on Banking Supervision (BCBS) to reform two, key areas of regulation take effect. That is the view of Jean-Marc Servat – chairman of the European Association of Corporate Treasurers (EACT).
In two letters of 7 September, Servat urged the Committee to reconsider core measures in its plans to: a) reduce variation in credit risk-weighted assets (RWA); and b) modify the Basel III Leverage Ratio Framework.
Writing in the RWA letter, Servat stressed that the Committee’s aims to restrict banks’ use of internal risk models – with the intention of reinstating a standardised compliance framework – “would impact the whole range of banking services that non-financial companies require: loans, credit lines and overdrafts, derivative products [and] cash management tools”.
Servat noted that banks have estimated their risk-weighted capital needs would rise significantly as a result of the planned changes.
“We fear that this could lead to an important contraction in lending to non-financial companies,” he wrote – noting that banking products and services available to firms could not only reduce in variety, but become costlier, too.
“If added to the difficulties non-financial companies already face,” he warned, “we feel that the outcome could be more detrimental and destabilising to the economy as a whole than any benefit that can be expected from more capitalised banks.”
Servat cited further estimates from the European banking industry, suggesting that the proposed changes would force banks in the region to either raise an extra €300bn, or slash their balance sheets by 25%.
“Depending on the type of counterparty and the type of instrument,” he wrote, “the bank capital required for derivative products could increase by up to eight times from the current levels.”
He explained: “Non-financial companies are not able to bear the resulting cost increases. Yet derivative instruments are vital for non-financial companies [to manage] financial market risk linked to their daily business activities.
“The resulting contraction in hedging would leave the whole economy – including financial institutions that service these companies – less stable and more prone to volatility.”
In the Basel III letter, meanwhile, Servat took issue with the BCBS’s treatment of notional cash pooling, contained in its planned alterations to the Leverage Ratio Framework.
Indeed, he noted, “the consultation proposes that the balances be reported on a gross basis, which does not allow netting of assets and liabilities or the recognition of credit-risk mitigation techniques”.
As such, he wrote: “Grossing up the exposures within a notional pool will increase the pricing of these efficient and effective products, but will not reduce the credit risk.
“In fact,” he argued, “a bank does not have a greater overall risk with netted cash-pool accounts than with gross positions, as in both cases the cash-pool accounts are held within the same company, or the same group of companies. Therefore, the increased capital requirements are not justified by a greater risk for the bank.”
If the change goes ahead, Servat warned, corporations that take advantage of cash pooling would face increased costs and red tape from:
Servat strongly recommended that the BCBS should carry out an in-depth impact assessment of the potential change, and reconsider whether it is appropriate.
“We believe that non-financial companies should continue to have the choice between notional and physical cash pooling, or a combination of the two,” he concluded.