The effects of Basel III on corporate lending

The effects of Basel III on corporate lending

A lot has been said and written with regard to the introduction of Basel III. However, from discussions with our clients we learn that often a more comprehensive insight into the effects of Basel III on their banking relationships is desirable.

A better understanding of the underlying current in our financial system will facilitate the dialogue between bank and client and the management of the credit relationship.

The impact of Basel III on corporate lending is threefold:

  1. Increased internal charges for banks which will be passed through to borrowers
  2. Certain lending activities will be restricted (for instance long-term financing)
  3. Bank resources will be allocated to top tier clients

Next to lending, the hedging activities are also affected by an increase in internal costs being passed through as a result of credit valuation adjustments and re-margining obligations for the transaction counterparties. This will particularly affect lower rated companies and complex (hedging) transactions. Also worth mentioning is the fact that netting will not be allowed for determination of total exposures. This will also affect notional pooling, for instance.

In essence one can expect that costs associated with financial products will increase, while availability thereof may be limited, specifically when considering complex products. Basel III will impose a differing roll on banks in finding suitable financing and treasury solutions within the bank’s abilities given their regulatory restrictions. On the other hand the corporate client will need to understand the limitations of a bank in the provision of solutions for its lending and hedging activities. A better mutual understanding will lead to safeguarding the implementation of efficient instruments and limiting cost increases.

Dealing with the new financial market environment

This implies an understanding of available financial instruments and their respective treatment under Basel III in order to find the optimal solution to finance the execution of the corporate strategy. Quantifying the effect of Basel on current and alternative financial products will facilitate such a discussion. Managing corporate debt can become increasingly complicated. In the new financial market environment, the dialogue between banks and corporate clients will take on new dimensions.