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S&P Etude Bâle III et Solva II

S&P Etude Bâle III et Solva II

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Published by: clechantre on Sep 29, 2011
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11/18/2013

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Why Basel III And Solvency II WillHurt Corporate Borrowing InEurope More Than In The U.S.
Chief Credit Officer, EMEA:
Blaise Ganguin, Chief Credit Officer, EMEA, Paris (33) 1-4420-6698; blaise_ganguin@standardandpoors.com
Secondary Contacts:
Rob Jones, London (44) 20-7176-7041; rob_jones@standardandpoors.comRichard Barnes, London (44) 20-7176-7227; richard_barnes@standardandpoors.comThierry Grunspan, Paris (33) 1-4420-6739; thierry_grunspan@standardandpoors.comPaul Watters, CFA, London (44) 20-7176-3542; paul_watters@standardandpoors.com
Table Of Contents
September 27, 2011
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Why Basel III And Solvency II Will HurtCorporate Borrowing In Europe More Than InThe U.S.
The introduction of stricter regulatory frameworks for banks and insurers is likely to result, at best, in a repricingand, at worst, in a rationing of credit for corporates globally, in Standard & Poor's Ratings Services view. Webelieve that European corporates will feel the effect more harshly than their U.S. counterparts because they typicallyrely more heavily on banks for funding relative to capital market sources. The details still need to be ironed out onthe Basel III global regulatory standard on bank capital adequacy and liquidity and on Solvency II, which codifiesand harmonizes EU insurance regulation. Nevertheless, we believe these new regulations could bring about asubstantial change in behavior by lenders and borrowers, and lead to profound changes in the capital markets.Based on our simulations and certain assumptions, we calculate that the additional bank borrowing costs in theeurozone for corporates would be very large and range between €30 billion and €50 billion per year once theregulations are fully implemented by 2018. In contrast, we believe the impact would be significantly smaller forthose borrowing from U.S. banks, ranging from $9 billion to $14 billion. This represents an increase of between10% and 20% over current interest costs for corporate borrowers for Europe and the U.S., depending on banks'return on equity targets of 8% to 15%. We also anticipate that European corporates will increasingly turn to thecapital markets as bank financing becomes pricier and the terms and conditions more restrictive as a result of thenew regulations.Nevertheless, although we conclude that borrowing costs are likely to increase significantly, and that there is adanger of credit rationing for corporates over the next few years as a result of the introduction of tighter regulatoryrequirements for both banks and insurers, this is not to say that we are advocating a liberalization of the regimes.We believe the regulatory changes will likely enhance the stability of the global financial markets, and we aresupportive of a tightening of the regulatory environment for financial institutions.
Overview
The Basel III and Solvency II proposals aim to enhance regulation of the banking and insurance sectors, respectively, starting in2013.
The combined impact for corporates could be higher funding costs, lower availability of longer term credit, and a lower equityinvestor base.
We expect the impact to be greater in Europe because corporates typically rely much more on banks for funding than their U.S.counterparts.
Among these corporates, the privately held, highly leveraged entities with a narrow business scope are likely to be affected themost, in our view.
Based on certain assumptions and all other things remaining equal, we believe funding costs could increase in aggregate bybetween €30 billion and €50 billion for eurozone corporate borrowers and by between only $9 billion and $14 billion for U.S.corporate borrowers.
This represents an increase of between 10% and 20% over current interest costs for corporate borrowers for Europe and the U.S.,depending on banks' return on equity targets of 8% to 15%.
Standard & Poors
| RatingsDirect on the Global Credit Portal |
September 27, 2011
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The Main Milestones Of The Regulatory Changes
Although the two regulatory frameworks Basel III and Solvency II were developed separately, the former by theBasel Committee on Banking Supervision and the latter by the EU, the financial community often refers to them intandem. This is because, in combination, we expect the various changes to transform behavior on the capitalmarkets as various aspects of them are implemented over the period 2013-2018. Although the timing of theirimplementation could be deferred or amended, the broad frameworks of the two regulatory regimes appear unlikelyto change. We provide a summary of the key milestones below (see table 1). For an outline of the key points of theregulations see "Appendix: Basel III and Solvency II: A Primer", at the end of this article.
Table 1
Key Implementation Milestones Of Basel III And Solvency II For Corporate Borrowers
2013 2015 2018Basel III
The cost of over-the-counter derivatives will risesignificantly for end-users because of a steepincrease in regulatory capital requirements forbanks related to these transactions.The introduction of the liquiditycoverage ratio assumes that liquidityfacilities (use without conditions) be100% drawn, versus 10% drawn withinone month for credit facilities with adedicated use.The introduction of the net stable funding ratiowill require banks to provide 50% stablefunding requirements for loans below one year,100% for loans above one year. Also,corporate bonds rated 'AA-' and above needonly 20% stable funding, corporate bondsrated between 'A' and 'AA-' 50%, and below'A' 100%.A sharp increase in market risk requirements forproprietary trading will increase the incentive forbanks to lend to corporates.Deposits of small and midsizeenterprises (SMEs) will be assumed tobe as stable as retail deposits. Theregulation assumes an outflow of 5% /10% on SME deposits over aone-month horizon compared with anoutflow of 75% for large corporates.
Solvency II
Until 2013 (the earliest possible implementationdate) there are no regulatory capital requirementsfor asset risk
--Various transitional positions over a period of up to 10 years--
The most recent potential calibration of SolvencyII (Quantitative Impact Study 5; QIS 5) introducesrisk-based capital requirements for asset risk.Lighter risk weights on short-dated highly ratedcorporate bonds and high weights on equities,private equities and long-dated lowly ratedcorporate bonds.
The New Regulations Will Tighten Corporate Funding Conditions
As these two regulatory frameworks are rolled out over the next few years, we anticipate corporate treasurers theworld over will ask themselves two questions: Will I still have the same amount of funding available? And if so,under what conditions? The good news about Basel III is that, by substantially raising risk weights for marketoperations, regulators have made it more likely that banks would have a greater incentive to lend. Nonetheless, thecombined impact of Basel III and Solvency II, although still uncertain in some respects, is likely to cause someprofound shifts both in terms of pricing and risk-taking behavior by banks and insurers, in our view.
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Why Basel III And Solvency II Will Hurt Corporate Borrowing In Europe More Than In The U.S.

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