EU firms hit harder by regs than US
Thursday 29 September 2011 - by Andrew Hickley
Regulatory initiatives such as Basel III will hit European businesses much harder than their US counterparts, Standard & Poor's has warned.
The report anticipates that banks across the world will raise the cost of lending in order to maintain high returns on equity.
Basel III's capital and liquidity requirements will see banks having to borrow costs on their investment grade loans by around 0.7 per cent to maintain a 15 per cent return on equity, it says.
Meanwhile it calculates that the issuance of speculative grade loans will see banks increasing interest rates by 1.64 per cent to keep to these high returns, as they grapple with additional risk weights they must hold against these loans.
Both Solvency II and Basel III rules will also raise the incentives for banks' to issue shorter-term loans, as they will have to hold less capital against these than they will for long-term transactions, it says.
S&P adds that the regulations will make lenders less likely to lend to any market segments they perceive as too risky.
"We believe that corporates will increasingly turn to the capital markets as bank financing becomes more reflective of risk and terms and conditions more restrictive," the report's author, S&P chief credit officer Blaise Ganguin said.
"Nevertheless, we believe that in the near term some of the less diversified, highly leveraged corporate entities, or those firms that simply did not want to contend with public disclosure requirements in Europe, could find themselves scrambling for cash."
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