The Bank of International Settlements (BIS) published the latest Basel III monitoring report on the last day in February. Given that it starts by advising that “Virtually all participating banks meet Basel III minimum and target CET1 capital requirements as agreed up to end-2015”, it’s not surprising that it has hardly caused a ripple in the headlines. The charts on page 22 show most banks passing the first hurdle – if not some of the subsequent ones.
The headlines were made earlier in the year and towards the end of last when BIS, as The Economist described, attempted to standardise the approach to risk weighting of assets – which in many European cases meant higher capital requirements. In the event, the agreement was reached to soften the rules after much lobbying. Much of the preceding debate revolved around the impact on lending. It’s a well-worn point that banks can’t increase capital and lending at the same time. Therefore banks are, in effect, both the cause of and solution to the 2008 crisis. For those with whom that diagnosis doesn’t sit too well there’s comfort that governments, shadow banks and peer to peer lending have all found a role to play, but the need for traditional bank lending remains.
The European Central Bank publishes 6-monthly changes in businesses’ access to funding. A nice chart on page 18 shows the ups and downs of availability of various forms of credit (including loans, overdrafts and trade credit) to both SMEs and large enterprises in the Euro Area. It’s possible to see clearly how bad SMEs’ predicament was in 2013 and that it’s improved substantially over the last two. However, I found it especially interesting because it shows some marked credit access dips for large enterprises. Given the well-publicised global focus on SMEs, I’d not spent too much time considering what was happening with large enterprises. Evidently they feel the pinch too.
In that context it seems less surprising that BIS had a hard time getting agreement to changes that might make giving loans of all sorts more difficult. In the build-up to the discussions they published research showing that what I described above as “a well-trodden agreement” isn’t the only one and, additionally, may also not be correct. The research suggests that the better capitalised a bank is the lower its borrowing costs and therefore more able to lend. The lending component of the banks’ lobbying may well have been the most socially useful but it wasn’t the only one. Making a profit is, unsurprisingly, a concern to them and regulations designed to make the system safer has taken its toll on margins especially in Europe. It looks a bit like BIS has balanced its own argument about lending with industry concerns.
As lending seems set to be an important, but not the only, consideration for banks and regulators businesses of all sizes will be spending time to come considering their funding options and when they do, they shouldn’t forget to look here.