trends in cross border and wholesale funding, and regulatory impact
TRANSCRIPT
TRENDS IN CROSS-BORDER AND WHOLESALE
FUNDING & REGULATORY IMPACT
Subbu Loganathan
Kramerica Consulting
AGENDA
Introduction – Funding Structures for Banks across the world Funding Patterns and Regulatory Pressures
Wholesale Funding
Cross-border bank funding
Impact of the Financial Crisis on Funding Structures
What the Crisis revealed about Wholesale Funding
What the Crisis revealed about Cross Border Funding
Regulatory Capital and Liquidity reforms and Bank Funding
Structures
Learnings
Learning 1 - Bank Funding Structures since the Financial Crisis
Learning 2 - Cross Border Funding since the Financial crisis
Q&A
INTRODUCTION TO BANK FUNDING STRUCTURES
INTRODUCTION TO WHOLESALE FUNDING PATTERNS
INTRODUCTION TO CROSS-BORDER FUNDING
IMPACT OF FINANCIAL CRISIS ON FUNDING
STRUCTURES
In contrast with historical systemic crises where the runs were mainly from
retail depositors, both the financial crisis that intensified with the Lehman
Brothers bankruptcy in 2008 as well as the European sovereign debt crisis as
of 2010 were largely centered on dry-ups in wholesale funding liquidity
Importantly, there has been a geographical fragmentation of liquidity in
global markets, notably around the sovereign debt crisis, unwinding partially
the financial globalisation trend of the last two decades.
The main response to combat these tensions have been central banks’ non-
standard policy actions.
The financial crisis resulted in worse Interbank access and volume for longer
terms funding as compared to overnight maturities
The cross-border funding effects were quantitatively stronger in the
sovereign debt crisis for banks headquartered in peripheral countries.
WHAT THE CRISIS REVEALED ABOUT WHOLESALE
FUNDING
Funding at short maturities instead of longer maturities. Resulting in
collective withdrawals during the credit and liquidity crunch
Wholesale funding on a secured basis Resulting in a freeze of repo
funding markets (“a run on repo”) due to concerns on quality of collateral.
More interconnected financial system due to both bank and nonbank
institutions providing liquidity to each other resulting in collapse of
interbank markets due to hoarding of liquidity during the crisis.
Complex interactions between bank assets and liabilities Resulting in
asset fire sales to generate liquidity during a funding freeze.
Variations in value of collateral and margin requested and other funding
market conditions Resulting in major changes to bank leverage and credit
processes.
WHAT THE CRISIS REVEALED ABOUT CROSS BORDER
FUNDING
Financial fragmentation and deleveraging have impacted cross border
funding patterns.
There was a significant decline in foreigners’ investments in bank-issued debt
securities located in the stressed euro area countries of Ireland, Italy, Portugal
and Spain, while the banks in core euro area countries experienced the exact
opposite.
The changes were smaller in non-euro area advanced economies.
In the euro area, foreign investors can be differentiated between core and
stressed economies, reflecting financial segmentation and and ongoing
bank deleveraging.
REGULATORY REFORM AND BANK FUNDING – BASEL
III CAPITAL REGULATION
Basel III Capital regulations require more and better capital than Basel II regulations:
The majority of the minimum capital requirement should be of the highest quality (common equity).
Various buffers are added for macroprudential purposes or to account for the systemic relevance of some institutions.
Basel III also requires more capital to better cover risks from : securitisations,
the trading book (including prop trading), and
banks’ exposures to derivative counterparties, other FCs, and CCPs
A non-risk-based leverage ratio will be added to minimum requirements in 2018 and could stem a buildup in leverage caused by off-balance-sheet exposures and repo transactions
REGULATORY REFORM AND BANK FUNDING – BASEL
III LIQUIDITY REGULATION
25.0min
1
30%75max
OutflowCash
InflowsOutflow
LA
T
LCR
Objective :
Liquidity even under very severe liquidity
stress over 30 days w/o govt & Central Bank
assistance
Minimum requirements
NSFR
Objective :
Reduce maturity mismatch between funding
and assets
Assets > 1 y funded by liabilities > 1y
1RSF
ASF
IMPACT OF REGULATORY REFORM ON BANK FUNDING
STRUCTURES
Basel III Capital regulations and OTC Derivatives reforms will enhance
safety of markets but will encumber more assets.
Some changes to funding structures (including more equity) combined
with reallocation of losses upon bank failure among different debt holders
can produce disproportionate changes of funding costs that are not easily
anticipated.
Basel III Liquidity Regulations aim for longer and more stable funding :
Some aspects of the liquidity regulations could encourage covered bond
issuance and increase asset encumbrance (as covered bonds qualify as
part of HQLA)
LEARNING 1 : BANK FUNDING STRUCTURES SINCE THE
FINANCIAL CRISIS
Since the crisis began, banks around the world have :
raised their capital adequacy ratios,
reduced wholesale funding,
and in some cases raised more deposits,
all of which have improved their stability.
However, distressed banks funding structures have not similarly
improved and they remain vulnerable.
The global financial crisis caused substantial stress in wholesale funding
markets, forcing banks to adjust their funding models.
Trends across global bank funding structures:
Europe – not out of the woods yet
US – Reduced secured funding
Asia and other – slightly increased wholesale funding, but still less than US or Europe
LEARNING 2 : CROSS BORDER BANK FUNDING SINCE
THE FINANCIAL CRISIS
Cross-border banking brings important benefits, but also exacerbates stresses, as
the global financial crisis revealed very clearly.
Financial integration in general, and cross-border banking in particular,
accelerated the transmission of the crisis from its origins in US housing markets
to wholesale financial markets across the world.
Euro Region :
The financial crisis has induced many banks to focus on core activities and
markets, with less emphasis on cross-border expansion.
However, some strong, large banks have expanded overseas during the
crisis, using capital raised by domestic disposals in order to acquire foreign
targets at attractive prices.
Western Europe experienced the largest reduction in cross-border flows,
however these flows have not recovered as rapidly, unlike in other regions of
the world.
The impact on Central and Eastern European countries was modest and
probably mitigated by the presence of foreign banks.
Outside Euro area –
Though the financial crisis impacted almost all global economies and banking,
the cross-border funding activities for advanced economies and banks outside
the euro zone has rebounded and remained fairly stable since 2012.
