New Financial Rules Will Hit Corporate Borrowing Harder In Europe Than In U.S.

by: Research Recap

The introduction of stricter regulatory frameworks for banks and insurers is likely to result, at best, in a repricing and, at worst, in a rationing of credit for corporates globally, in Standard & Poor’s Ratings Services view:

We believe that European corporates will feel the effect more harshly than their US counterparts because they typically rely more heavily on banks for funding relative to capital market sources.

The details still need to be ironed out on the Basel III global regulatory standard on bank capital adequacy and liquidity and on Solvency II, which codifies and harmonizes EU insurance regulation. Nevertheless, we believe these new regulations could bring about a substantial change in behavior by lenders and borrowers, and lead to profound changes in the capital markets.Based on our simulations and certain assumptions, we calculate that the additional bank borrowing costs in the eurozone for corporates would be very large and range between €30 billion and €50 billion per year once the regulations are fully implemented by 2018.

In contrast, we believe the impact would be significantly smaller for those borrowing from US banks, ranging from $9 billion to $14 billion. This represents an increase of between 10% and 20% over current interest costs for corporate borrowers for Europe and the US, depending on banks’ return on equity targets of 8% to 15%. We also anticipate that European corporates will increasingly turn to the capital markets as bank financing becomes pricier and the terms and conditions more restrictive as a result of the new regulations.

Nevertheless, although we conclude that borrowing costs are likely to increase significantly, and that there is a danger of credit rationing for corporates over the next few years as a result of the introduction of tighter regulatory requirements for both banks and insurers, this is not to say that we are advocating a liberalization of the regimes. We believe the regulatory changes will likely enhance the stability of the global financial markets, and we are supportive of a tightening of the regulatory environment for financial institutions.