While it may not trip off the tongue, “mandatory capital regulation” is a phrase on the lips of all those working in the European syndicated loan market.
The Basel Committee has now clarified its definition of liquidity facilities and the loans market has welcomed the reduction of how much liquid assets must be held against undrawn lines from 100% to 30%. But the shift that is still to come as a result of this 30% requirement cannot be underestimated.
For a start, lenders expect prices to rise, and rise sharply. Margins may have increased slightly over the last year or so, according to senior bankers, but lenders have not yet started to pass on the cost of these capital requirements to their customers. When they do, borrowers will be in for a shock.
The LCR has also caused market participants to re-evaluate undrawn revolving credit lines. Credit committees, egged on by their relationship managers, have been willing to take a hit on loss-leading undrawn revolvers on the twin provisos that those lines will remain undrawn and that a flurry of ancillary business will come their way in return for those lines. Having to provide expensive assets to hold against undrawn lines might well make credit committees think again about signing them off.
This in itself may trigger big changes in the make-up of the loan market globally, as rising costs force smaller lenders to bow out or merge with others. Perhaps not the survival of the fittest, but certainly the survival of the fattest balance sheets.
But then, the loan market has been here before. As one of the oldest capital market products, it has weathered many regulatory storms and seen great changes across the global economic landscape over the years.
The idea that it is not the strongest of the species that survives, nor the most intelligent, but the one adaptable to change, is often falsely attributed to Darwin (the quote’s etymology is far less glamorous — it was first uttered by a management sociologist in Louisiana). But certainly, it reflects the loan market’s evolution as the wider environment has changed. Syndicated loans remain as credible and relevant a product as they were back in the early 1980s, when banks were not required to hold any liquid assets at all. But with the arrival of the LCR due in just under 24 months, the clock is ticking.