Banks’ alarm over final set of Basel III reforms
Lobbies for removal of proposed rules that could hinder short selling exposures
Banks are sounding the alarm about a proposed global rule aimed at forcing them to fund themselves more safely, warning that it could have “severe” knock-on effects on short selling and other important equities market transactions.
Industry lobbyists have warned the Basel Committee on Banking Supervision that proposed funding rules could make it five times more expensive for banks to facilitate short selling, in which investors bet that share prices will fall. The rule would also make it much more expensive for banks to provide equity swaps, according to the letter from the Global Financial Markets Association and the Institute of International Finance, two global lobbying groups.
If other financial institutions, so-called shadow banks, do not step into the breach, investors could be forced to pay more to bet on equity price moves. The banks are making a last-ditch effort to modify the Net Stable Funding Ratio, seen as the final plank of the “Basel III” banking reforms that seek to prevent a repeat of the 2008 financial crisis.
The Basel Committee’s NSFR aims to ensure banks hold a minimum amount of stable funding based on the characteristics of their assets. The measure, which aims to prevent funding squeezes such as the one that contributed to the downfall of the British bank Northern Rock, is expected to come into force in 2018.
It comes alongside a Liquidity Coverage Ratio ensuring banks hold enough assets such as government bonds that can easily be converted into cash. Global regulators in January issued revised proposals for the NSFR, saying it was an essential component of the Basel III reforms aimed at making banks more resilient.
The letter says banks have “serious concerns” about the treatment of equities under the NSFR regime, saying the regime could “significantly increase transaction costs across equity markets for all participants”. It adds: “By unnecessarily increasing the funding cost for banking organisations’ equity market intermediation activities, the revised NSFR would also potentially force such activities into the largely unregulated shadow banking system, increasing systemic risk.”
The letter cites research by Oliver Wyman, a consultancy, which homes in on areas such as securities lending, which is used to facilitate short selling. Some $760 billion of equity securities were out on loan as of the end of 2013, the study says.
The analysis finds that the regime could drive up the cost of covering a short position, making it four to five times greater than the current burden. The letter asks these so-called “stock borrow transactions” not to be classified as loans by the bank for the purposes of the new funding rules.
The banks also warn that the rules would impair the functioning of the equity swaps market, and boost costs associated with investment in equity indexes.
— Financial Times
