Banks’ funding costs to plateau after Basel III implementation

The cost of funds for banks is not expected to increase further and could potentially fall post the implementation of Basel III as markets have already priced in risks, say treasurers.

  • 07 May 2012
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Financial institution funding costs are not anticipated to increase substantially after 2013 as markets have already priced in risks and because competition for business will rise.

The requirement under Basel III for banks to hold higher capital is expected to reduce the probability and severity of banking crises in the future, but these rules have also had a negative impact on financial institution’s profitability and liquidity.

As a result of these new regulations, the cost of funds has been steadily rising since the global financial crisis in 2008. However, bank treasurers believe that costs have peaked and that the numbers could even be overestimated.

“In terms of the evolution of Basel III, banks have already incorporated the pricings. When [the European debt] situation stabilises, I would even say that the funding costs could even be lower because the market has already priced every risk,” said Claudio Cocchis, Greater China treasurer for Société Générale at the conference at Euromoney Seminars’ Eighth Annual Syndicated Lending Asia Pacific Conference on May 4. “It may be difficult to forecast a further increase [of funding costs] from now on.”

Also due to mounting competition between financial institutions in the Asia, costs are predicted to remain low.

“I can see a scenario where pricing doesn’t change as much just because of the competition in Asia and so many banks are wanting a story to tell about Asia,” declared Peter Williams, head of Asia global treasury services management at Citibank at the conference.

The loan market has been a reliable source of funding for Asian borrowers over the last decade, helping companies refinance, fund new projects and keep them afloat.

In Australia, funding costs have reached an all-time high since the global financial crisis. The funding costs for existing bank loans have increased by about 20 basis points (bp) since mid-2011, the Reserve Bank of Australia (RBA) said in its Statement on Monetary Policy on April 27.

The tightening in global liquidity has also impacted interbank markets around the globe as financial institutions sought to shore up their capital, which contributed to the increase in funding costs previously.

“The global financial crisis is putting so much pressure on the banks to do their homework in terms of the liquidity ratios. The interbank market is dead and Basel III doesn’t really help rewrite the interbank markets,” said Olaf Stier, regional head of treasury for Asia at Commerzbank. “Overall, it’s a very harsh reaction to a situation that already took place.”

  • 07 May 2012

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5 JPMorgan 1,507.04 3 9.29%

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2 UniCredit 3,440.98 25 8.50%
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5 SG Corporate & Investment Banking 2,478.18 21 6.12%

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1 Standard Chartered Bank 126.67 2 3.90%
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