New regs could cause banks to pull some credit lines

In March, US regulators proposed several revisions to the international framework that’s designed to strengthen safety and soundness regulations for banks. One of them, unfortunately, could impact some US banks’ appetite for extending certain types of lines of credit.

TL;DR. The revisions are part of what’s known in the US as the Basel III “endgame” reforms. (Hat tip: Avengers.) They could require big US banks to hold capital against the unused portion of consumer credit lines and some supply chain finance products, making those products less attractive for banks to offer to consumers and businesses.

This particular part of the Basel III revisions could most likely affect large banks that are major credit card issuers, but it could also have consequences for banks’ supply chain and trade finance businesses, Matthew Bisanz, a bank regulatory partner with law firm Mayer Brown, told CFO Brew.

The nitty gritty. The Basel Framework, an international set of banking standards and regulations first created by global standard setter the Basel Committee on Banking Supervision (BCBS) as far back as the 1980s and updated over the years, deals with the prudent regulation of banks and their safety and soundness—in particular, ensuring banks have enough capital to withstand unexpected losses and threats to liquidity.

This latest Basel III revision changes how banks have to calculate the capital they need to hold against an off-balance sheet exposure, like the unused portion of a line of credit.

Under current US rules, banks often have the right to cancel consumer lines of credit at will, and therefore the unused credit doesn’t count toward the calculation of regulatory capital, Bisanz told us. In the latest Basel III proposal, though, the very largest banks would have to incur a capital charge for undrawn facilities. The change would impact credit cards, certain home equity lines of credit (HELOCs), and some revolving credit facilities, Bisanz said.

Unused lines of credit might not produce revenue for large financial institutions, but as a result of the Basel III change, they may have to set aside more equity “as a buffer,” including raising common stock, Bisanz said. “So now [banks are] holding capital against something that they don’t get any revenue from.”

As a result, the affected banks could “close infrequently used card accounts and reduce credit card lines as a whole,” according to a June 18 letter to US bank regulators from the Bank Policy Institute, a nonpartisan research group. Trade groups including the American Bankers Association, which represents banks of all sizes, and the pro-business lobbying group US Chamber of Commerce, also signed the letter.

Your horse in the race. CFOs, pay particular attention here. Because the Basel III endgame proposal would expand the definition of a bank’s “commitment,” it could encompass certain trade finance products that help businesses trade internationally, like supply chain finance (SCF) programs, receivables financing (factoring), and uncommitted standby letter of credit facilities, according to the Bankers Association for Finance and Trade (BAFT).

In a June comment letter to the Office of the Comptroller of the Currency, BAFT said, “Supply chain finance programs involve hundreds of thousands of US companies and consist primarily of a series of short-term transactions that are self-liquidating and do not serve as a source of leverage.” SCF generally offers “a cheaper form of financing resulting in less profit for the bank,” the letter continued. “Any slim profit that banks gain from supply chain finance purchases or financing in the form of the discount would be outweighed by the new 10% capital set-aside requirement.”

Comments on the Basel III endgame changes were due June 18, and a final rule is expected later this year or next year, Bisanz said.