US corporates may have an easier time that their European counterparts when it comes to future bank lending as banks begin to gear up for new capital requirements under Basel III.
However, the actual impact is as yet unclear, in particular as few analysts can agree on the impact of risk-weighted asset reductions on the amount of equity that banks will need to hold to meet tier one capital ratio requirements under the new guidelines.
The lack of consistency is in part a result of diverse risk-weightings applied by different banks. US Federal Reserve Governor Daniel Tarullo, in a speech last week, suggested the Basel committee should look at mechanisms to increase consistency in risk weightings applied by banks.
In a speech at the George Washington Law School, Tarullo said the US would adopt Basel III guidelines, but noted that there are things that the US would have done differently in drafting capital adequacy guidelines.
Imprecise or variable risk-weightings make it difficult to see the true impact that risk-weighted asset reductions will have on bank lending, but it will most certainly have some impact.
However, US corporates may see less of an effect on overall liquidity availability than those in Europe, as US corporates have access to a more liquid bond market and smaller US banks will see less impact—so businesses can look to their local banks to fill in some of the gaps.
A recent Barclays Capital survey suggests that US banks could see as much as $100 billion or $150 billion in equity shortfalls under Basel III requirements that will have to be made up either through risk-weighted asset reductions or through capital increases in the form of retained earnings or equity issuance.
In his speech, Tarullo also commented on banks’ plans to increase dividends, noting that firms must demonstrate that they meet capital requirements under Basel III, along with passing a number of other baseline measures, as part of new dividend guidelines being issued by the Fed.