* Basel agreement seen giving banks more capacity to lend
* But weak economy weighs on credit demand
* Uncertain outlook also means banks nervous about lending
* Rules changes may have bigger impact in U.S. but not too
By Paul Carrel and Marc Jones
FRANKFURT/LONDON, Jan 7 A decision by global
regulators to give banks more time and flexibility to build cash
reserves will not boost lending or speed recovery in
debt-strapped Europe, where firms and households have scant
appetite to borrow.
In the United States, where the economy appears to be
rebounding, the rules could loosen credit a bit and could help
revive mortgage securitization. But any boost to the U.S.
housing market would be mostly psychological.
On Sunday, the Basel Committee gave banks four more years to
build a backstop against future financial shocks and allowed a
wider range of assets, including stocks, residential
mortgage-backed securities and lower-rated corporate bonds.
An earlier draft of these global liquidity rules, designed
to help prevent future banking crises, was more stringent. The
more relaxed regime means lenders will in theory have more scope
to use some reserves to help struggling economies grow.
The changes "will make it easier in the future to lend to
companies than the originally planned rules did," said Bank
Austria, the UniCredit unit that is the biggest lender
to Europe's developing economies.
But for the euro zone economy, which the European Central
Bank suggests will shrink 0.3 percent this year, easing banks'
ability to lend cannot compensate for the dearth of demand for
loans among wary consumers and businesses.
"Overall it is positive, but I don't think it is enough to
turn around the whole situation in the short-run," Berenberg
Bank economist Christian Schulz said of the Basel rules change.
He said the effect on the 17 countries that use the euro
would amount to just 0.1-0.2 percentage points of annual output.
The ECB has struggled to boost lending. It channelled more
than 1 trillion euros of cheap, three-year loans to banks early
last year, saying this helped avert a major credit crunch.
But demand remains the real problem.
A recent ECB survey showed euro zone banks made it harder
for firms to borrow in the third quarter and expected to toughen
loan requirements further even though their own funding woes had
By far the most important reason banks cited for tightening
credit standards for firms was the economic outlook. Household
lending was hurt by worries about the housing market's health.
Across the Atlantic, housing market news has been more
encouraging. U.S. single-family home prices in October rose for
the ninth straight month and economists expect housing added to
growth last year for the first time since 2005.
Allowing banks to include residential mortgage-backed
securities among assets they set aside for emergencies could
spur more lending by U.S. banks, and help revive securitisation,
or packaging of mortgages and other loans into bonds.
"This should, at the margin, favor U.S. banks relative to
European banks, because the use of these assets is much less
common in most European countries than it is in the United
States," said Tobias Blattner, economist at Daiwa Europe.
But the softer rules may not change much for the largest
U.S. banks, Julian Jessop, analyst at Capital Economics, wrote
in a note to clients. Jessop noted that many of these banks
already met the original stricter requirements.
"Some smaller banks would have struggled to do so by (the
original proposed deadline of) 2015, but it was always likely
that they would have been given more time," he added.
Demand for privately issued mortgage-backed securities could
increase, analysts said, which could hurt those issued or
guaranteed by the big U.S. mortgage financing agencies.
"But still, implementation has now been extended six years
to 2019, so any potential effect will not be felt for a long
time," said Brian Lancaster, the co-head of structured-product
strategy and analytics at Royal Bank of Scotland.
First, U.S. regulators must iron out a quirk in the rules
that say mortgage bonds must be backed by full-recourse loans.
At least a dozen U.S. states, including Texas and California,
only allow non-recourse loans, in which lenders cannot come
after a borrower if a house sells at auction for less than the
amount still owed. This differs from Europe and Australia, and
the practice would disqualify those loans.
"For this to work, U.S. regulators will have to deviate from
the precise proposals of the Basel committee," said Tom Deutsch,
the executive director of the American Securitization Forum.
GOVERNMENT BONDS LOSE OUT?
One notable change could be diminished support for
government bonds. Under the original Basel draft, the emphasis
was almost exclusively on holding sovereign debt but the changes
mean some corporate debt rated as low as BBB-, a range of
easy-to-sell shares and double-A rated residential
mortgage-backed securities can also be used.
The iTraxx senior financial index, which
measures the risk of a default on bank debt, saw spreads narrow
on Monday from 125 to 121.5 basis points, a sign that investors
see the changes as potentially beneficial for bank debt.
"Credit spreads are a bit tighter," said one credit market
trader. "But it (the index) has had a very big performance since
the start of the year, so perhaps that has limited the impact we
There are other restricting factors.
Deductions, known as haircuts, will be taken from the
assets' value to ensure they provide adequate protection even if
their value drops. Combined, they will be allowed to account for
only 15 percent of what a bank must hold.
"From a big picture perspective, these revisions are
potentially negative for sovereign debt in so much as they
reduce banks' imperative to hold government bonds," said
analysts at Rabobank.