Corporate lending under Basel IV
The desk views Basel IV's implementation as a significant shift for corporate lending that will disproportionately affect Nordic and European banks. Per the full note from Nordea, this revamped regulatory landscape mandates increased capital reserves and restricts the use of advanced internal risk models, potentially leading to stricter lending conditions for corporations. As banks scale back on lending under tighter regulations, the overall credit environment may tighten, impacting transaction volumes in FX markets. Monitoring the resulting shifts in lending activity will be critical for traders navigating these changes.
What the desk is arguing
The desk frames the transition to Basel IV as a pivotal moment for corporate borrowers, particularly in Europe and the Nordics. With the emphasis on standard risk models, banks might face challenges in assessing unique borrower risks accurately, potentially resulting in higher costs of capital for corporates.
Notably, per Nordea, banks will be compelled to bolster capital reserves, which could affect their willingness to extend credit. This overhaul will not only influence lending but could also alter the competitive landscape among banks, particularly for those adept at risk assessment under the current models.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12.
The desk's view aligns with jpmorgan but is on the lower end of the spectrum when considering bofa's more bearish outlook.
How other firms see it
Investment banks like jpmorgan and goldman express a more optimistic view of how Basel IV will reshape lending, positioning themselves accordingly. Contrarily, bofa holds a more cautious stance, emphasizing potential downsides of regulatory changes.
Watch EUR/USD for reactions to shifts in corporate lending activity and central bank policies surrounding the implementation of Basel IV regulations as they directly influence credit environments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Basel IV introduces heightened capital reserves and stricter risk model requirements, impacting corporate lending.
- 02Nordic and European banks may face competitive pressures as internal risk models are minimized.
- 03Traders should monitor shifts in lending behavior as a potential signal for broader market movements.
- 04Anticipating higher borrowing costs could influence currency valuations and trading strategies.
Market implications
Traders should closely watch the EUR/USD pair and be prepared for volatility as banks adjust their lending practices. Specific focus on changes in credit availability will signal shifts in liquidity and demand dynamics in European markets.
Risks to this view
A potential loosening of regulatory frameworks or unexpected economic growth that encourages borrowing could reverse the predicted tightening in credit conditions. Additionally, if banks demonstrate resilience in adapting to Basel IV, the anticipated lending impact might not materialize.
Financing Corporate lending under Basel IV 14-05-2021 Basel IV, or actually finalisation of Basel III, is a major overhaul of global banking regulation. It will change the playing field in banking, particularly for Nordic and European banks. Some of the biggest changes should be in lending to corporates.
How can borrowers prepare and mitigate the impact? In the latest issue of Nordea On Your Mind, "Corporate lending under Basel IV", we explore what has led to the implementation of Basel IV and what the likely implications will be for banks and for corporate borrowers. Basel who?
Banks are supervised by national regulators, but since 1973, bank regulations have been co-ordinated globally by the Basel Committee of the Bank for International Settlements (BIS), jointly owned by 63 central banks from countries that together account for 95% of global GDP. Its first framework, Basel I, was introduced in 1988 and followed by Basel II in 2004 and Basel III from 2013. The finalisation of Basel III has become so comprehensive that it is increasingly seen as an entirely new framework, and commonly referred to as Basel IV, to be introduced from 2023.
Aiming for strengthening the banking system and harmonising risk models Basel IV aims to make the global banking system more robust. Banks will generally need to increase their capital reserves to further improve their ability to absorb credit losses. Confidence in how banks assess credit risks will be addressed by sharply limiting the use of internal advanced risk models, leading to more widespread use of standard risk models and fewer regional and country variations in how risks are assessed and measured.
Banks losing benefits from internal risk models The price of making banks use the same standard risk models to a much greater extent is that they are less sophisticated, have arguably not performed better historically, and do not give some borrowers benefits which they deserve from a credit risk point of view. Banks that have relied heavily on advanced internal rating models may find the economics of their lending significantly worse under Basel IV. According to the European Banking Authority , the European banking system will need to raise almost 20% additional Tier 1 capital after Basel IV is implemented.
Banks in Europe, and particularly in the Nordic region, will be among the most affected globally. Corporates should consider the merits of diversified funding and a credit rating We believe banks will need to generate a return on the additional capital they need to hold. The most affected lenders will include heavy users of advanced internal rating models.
They will need to adjust pricing or reduce exposure to the most affected borrowers, such as large corporates without a credit rating, unless they are prepared to accept lower returns. We believe corporate borrowers should evaluate their access to capital markets funding, and how to optimise it, (such as by obtaining a rating) to have maximum flexibility when Basel IV is implemented. We expect Basel IV to further stimulate the already substantial migration from bank to bond funding by Nordic large corporates seen over the past decade.
Views from the experts To understand what has led to the introduction of Basel IV and what its likely implications will be for banks and for corporate borrowers, we have interviewed Anders Kvist , Senior Adviser to the Inspector-General of the Swedish FSA Finansinspektionen , as well as Timothy Farrar and Karsten Skov from LC&I Public Affairs and Balance Sheet Management – Pricing, respectively, at Nordea. Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.
Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.
We wanted to show you a Spotify but you cannot see it as you have not enabled cookies Click here to update your consent Listen to the related podcast episode Did you think you would find drama in a podcast on bank regulations? Think again. Johan Trocmé, Viktor Sonebäck and Kajsa Andersson from Nordea Thematics talk about what Basel IV is, why the Basel Committee for Banking Supervision is involved in regulations to begin with, and what they are hoping to achieve with this finalisation of Basel III.
Most importantly, they explore what this will mean for corporate borrowers, based on findings in their recent NOYM report. Get the report Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. If you are a corporate client and want to access the full Nordea On Your Mind report, please contact viktor.soneback [at] nordea.com (Viktor Sonebäck) .
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