January 7, 2013 / 11:16 PM / in 5 years

Looser bank buffer rules no panacea for Europe, U.S.

FRANKFURT/LONDON (Reuters) - 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 (CRDI.MI) 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 channeled 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 eased.

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 securitization, 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.


    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 have seen.”

    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.

    Additional reporting by Eva Kuehnen and Sakari Suoninen in Frankfurt, Michael Shields in Vienna and Adam Tempkin of IFR and Steven C. Johnson in New York; Editing by David Gregorio

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