Those looking for when the next financial crisis might be should set a
reminder for Jan. 1, 2018.
That's when a host of new rules are scheduled to come into force that
are likely to further constrain lending ability and prompt banks to only
advance money to the best borrowers, which could accelerate bankruptcies
worldwide. As with any financial regulation, however, the effects will start to
be felt sooner than the implementation date.
Two key rules are slated for 2018: The leverage ratio set by the Basel Committee on Banking Supervision and International
Financial Reporting Standard No. 9, defined by the International Accounting Standards Board. Other rules that
require banks to stop using their own internal measures to assess risk
start to be introduced from next year.
Basel III has already been blamed for reduced liquidity in global markets
and slower credit growth. What's about to be rolled out will be a steroid shot
to that.
Past its Heyday
As regulation
has increased, the number of credit-related jobs at financial institutions has
plunged
IFRS 9, for instance, will require earlier recognition of expected
credit losses, a move that according to some credit analysts could increase
nonperforming assets at some banks by as much as a third. As bad loans -- or
their recognition, for that matter -- increase, so do capital requirements. In
other words, it'll be more expensive and difficult for banks to lend.
New Basel rules aimed at reducing the leeway banks currently enjoy on how
they account for risk will come into effect over the next two years. The
regulations imposed after the global financial crisis already require
banks to set aside more capital for every dollar they lend, depending on a
borrower's credit standing. The trouble is, global regulators left the
decision on creditworthiness mostly to the banks themselves. A 2013
Basel study found
variations of as much as 20 percent in the risk weighting attached to similar
assets.
Starting from 2017 therefore, financial
institutions will no longer be able to use their internal models to assess risk
for derivative counterparties. In 2018, that will be expanded to
securitization and thereafter -- though the exact date is yet to be determined
-- lenders will have to evaluate all of their loan clients based on standards
set by the Basel committee.
According to the proposed rules, companies that
have higher revenues and lower leverage will require less capital from banks,
meaning banks will have an incentive to lend only to the biggest
corporates with more established businesses. Good luck to smaller enterprises
needing funds to increase sales.
Before that rule comes into force, however, the leverage ratio takes effect
on Jan. 1, 2018. From then, banks will be required to limit how much their
balance sheet is leveraged overall, effectively putting a hard cap on loan
growth.
It's increasingly difficult for banks to help spur global expansion,
no matter how low -- or negative -- benchmark rates are. But it's
about to get a lot tougher. Banks will tighten their belts and as they
deleverage, so will the world. That means more bankruptcies, lay-offs and fewer
jobs, which sounds very much like a recipe for a global crisis.
As former Bank of England Governor Mervyn King noted recently, the
massively detailed banking legislation that was enacted after the last
financial crisis has certainly created a lot of jobs for lawyers and compliance
officers. Perhaps those two areas will be the only bright spots post 2018.
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