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.
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.
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.