More pressure on banks may make it harder for businesses to get loans…

The best banking brains in the world are keenly poring over spreadsheets trying to work out how to cope with the massive changes being forced on them by regulators the world over.

First there were the reforms formulated by the Basel Committee on Banking Supervision, which cut their fun substantially – but that’s nothing compared with what’s coming in 2018.

A whole new set of rules will come into force that will further constrain banks’ lending ability, making them think very hard about who they will move from Santa’s nice list to the naughty list.

The Basel timetable for banking reform

Storm warning

The two new rules that will set the financial cat among the lending pigeons are the leverage ratio set by the Basel Committee on Banking Supervision and International Financial Reporting Standard (IFRS) No. 9, which is defined by the International Accounting Standards Board.

The leverage ratio will come into force on January 1, 2018, and will limit how much debt a bank can keep on its balance sheet, which will put a cap on loan growth. Then IFRS 9 will require that banks recognise expected credit losses on their balance sheets much earlier than they do now. Banking analysts say this will mean a rise of up to one-third in non-performing assets revealed on balance sheets.

The combination of the two – and the extra capital adequacy requirements Basel imposed – means that as the banks recognise more bad debt and cannot increase their debt levels, the amount of capital they have to hold will rise and lending will become more expensive and more difficult.

New measures on risk

Other rules to be introduced from next year will require banks to stop using their own internal measures to assess risk, first for derivatives, then for securitisation in 2018 and eventually they will have to evaluate all of their borrowers based on Basel standards.

The idea is to limit the options available to banks in pricing risk to very large companies and financial institutions. It stems from a Basel committee study that found variations of as much as 20 per cent in banks’ risk weightings for derivatives.

Now the banks will need to use internationally benchmarked measures, which may be set at levels they have not experienced before. While this may not affect Australian banks directly, if it forces international banks to increase capital ratios, local banks may have to tighten as well.

All told, businesses and other borrowers without spotless reputations may soon find it very hard to find a sympathetic ear among the big banks.

Self-inflicted wounds

All this harshness comes about because of the global financial crisis (GFC) and much of it is directed at the US banking sector, which precipitated the GFC. The crisis subsequently exposed the giant US banks as having too much leverage, inadequate liquidity, poor governance and risk management, and outrageous incentives schemes.

Unfortunately for the rest of the world, the current crackdown may hurt us more than it hurts the US behemoths. As banks worldwide restrict lending to tighten their belts and manage their debt, the rest of us will have to follow suit and asset values, particularly property in Australia, may begin to suffer.

Businesses will have to look elsewhere for funding or restrict their plans, which may mean lay-offs and slowing economic growth with fewer jobs and less consumer spending.

So, if you are thinking about financing your future, now may be a good time to talk to your lenders about a deal.