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CFO: Bank Liquidity Rules Could Curb Corporate Credit

October 01, 2012, 07:00 AM
Filed Under: Regulatory News

CFO reports the rules on liquidity levels set by the Basel III framework for bank capital could curtail banks’ appetite for underwriting lines of credit for companies. The article makes reference to recent panel of bankers and risk managers brought together by research firm CreditSights and regulators in the United States and Europe.

In the report, CreditSights said executives from the International Association of Credit Portfolio Managers, Mizuho Securities, and Barclays Capital stated the liquidity coverage ratio (LCR), a part of Basel III, “changes the way banks think about uncommitted credit lines,” including undrawn term loans, working capital facilities, and commercial-paper backstops.

According to the panelists, the focus for banks will go “from one of managing credit costs to managing significantly increased liquidity costs” for lines of credit. Banks will either have to eat the costs or charge borrowers more, CreditSights analysts wrote. “[They] are also likely to be more selective about making such commitments, focusing on relationships that can make up the increased costs by cross-selling other products.”

The Basel Committee says working capital loans to nonfinancial companies would be classified as credit facilities, so only the 10% assumption would be used. In contrast, financial-institution borrowers and in cases in which the revolver is used as a backstop to commercial-paper borrowing, the loan would be defined as a liquidity facility and thus a 100% draw-down would be used. That increases the amount of liquid assets that has to be held against those loans substantially.

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