General Roundup - View from the Riverbank April 2015
The Basel Committee continues its push to harmonise bank reporting standards in an effort to ensure that the models applied by banks when reporting on their risk weighted assets are consistent. The Pillar 3 disclosure rules require specific templates when reporting on capital requirements and asset creditworthiness but do give flexibility when it comes to securitisation exposure. The rules will kick in full towards the end of next year and will enable a truer comparison between the banks.
Peer-to-peer: On with the debate: so P2P lending (or "marketplace lending" as some prefer to call it), a radical new way of giving lenders and borrowers access to each other or just a volatile, fair-weather platform with no stable funding? The debate rages on and we are still haven't really see P2P play out during a full economic cycle - but if Wall Street's institutional investors, hedge funds and wealth managers are all buying in, is that a badge of credibility or more fool them? Here in the UK, Santander and RBS are entering partnerships with P2P platforms (although arguably that is more a referral relationship rather than "buying in") and the way the wind seems to be blowing is that this method of credit delivery will remain with us for some time to come.
FCA Investigation: The FCA has announced its first ever investigation into commercial and investment banking (not to be confused with the Competition and Market's Authority investigating retail and business banking). The issues which they will be focussing on are yet to be fully revealed (although note the terse words of another article in this quarter's publication) but the common view is that one of the things they will be looking at will be analysing the "one stop shop" for banking needs. Quite how this may impact certain strategies such as participating in a large revolving credit facility as a loss leader with a view to getting ancillary business, will remain to be seen. With new competition powers coming in April, the FCA will have the power to shut down business lines and ban products if they deem the market not to be functioning as it should, irrespective of whether there is any wrongdoing at play.
Systemically important financial institutions: It seems that global regulators are keen on designating as "Sifis" some of the largest funds and asset managers. What will this actually mean? They will probably be subject to stress testing at the very least and likely having to report on cash and hidden leverage, but will the regulators go the whole hog and impose bank like capital charges? The industry has been lobbying hard against this not least as funds and asset managers generally do not hold risk on their own balance sheet as banks do. The more pressing question is when will this come in and will it be too late to work out if indeed these entities are a systemic risk or not?
Time to test the stress again? Notwithstanding the above, the Bank of England has now presented the methodology on which it will be conducting its second stress test of the UK's biggest banks. More institutions will likely be covered this time (possibly even foreign banks and large insurers and, again notwithstanding the above, asset managers?) and this time they will be stress testing how leverage ratios are likely to emerge from a crisis as well as capital ratios. A Grexit or eurozone breakup may not specifically feature as specific stress factors, but a rather sharp contraction of the eurozone economy seemingly will. Cyber security hasn't made the cut this time either, but you'll be glad to hear a further drop in oil prices has. The results will be announced in December 2015 and will be based on the institutions' end of December 2014 balance sheets (other than in the case of Nationwide which will be based on its year end balance sheet being as at April 2015).
The return of M&A (finally): things are looking good – we are off to a healthy, punchy start to the M&A market in Q1 2015 with a big focus on healthcare and telecoms. Cost of financing remains cheap and easily available and rumours of further large cap deals abound. That said, we are not seeing much of an increase (arguably quite the reverse) in the more traditional PE sponsored LBO structures – this could be a valuation issue, a US regulator driven restriction on leverage in the PE sector more generally, the overhang of bad press which still crops up slamming the glory pre-crisis days or just the fact that a lot of IPOs are not quite getting the traction which commentators thought they might.
For sale: European bank loans: There is increasing competition amongst investors to snap up loan portfolios being sold as "non core" by European banks – performing or non-performing, it's a seller's market and prices have been rising accordingly. Some of these are now being financed by debt (which raises the old spectre of regulatory concern over leverage) and indeed now we are seeing portfolios with underlying borrowers in the more "risky" countries being included. We have acted for sellers, buyers, bidders and indeed, underlying portfolio borrowers in connection with this activity, and do not see a slowing pace any time soon.
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