Independent and bank-owned
lessors will be hit by new capital requirements, writes Antonio
The Basel III package was agreed
last month by supervisory authorities under the chairmanship of the
European Central Bank president Jean-Claude Trichet. It sets
detailed guidelines for banks’ capital and liquidity
The new rules, effective from
January 2019, require banks to hold a minimum 7% Tier 1 capital
(4.5% common equity requirement and 2.5% capital conservation
buffer), compared with the current 2% common equity
For the first time, total capital
requirements will pass the bar of 10% of assets.
The package is to be given final
approval at the next G20 meeting in November. Afterwards, at EU
level, it is expected that there will be a new Capital Requirements
Directive, which will need to be implemented in each member state
with all banks having to comply with the new requirements.
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Cost of loans
A knock-on effect on leasing is
likely, even though Basel III does not specifically address the
sector. Experts say that banks’ spending capacity will be reduced
because they will be required to hold more capital. It will also
push up the margins that banks require, again having an effect on
Kenneth Gray, asset finance and
banking consultant at international law firm Norton Rose, says:
“The capital that banks have to have is going to be more expensive
for them to raise. What will be affected by Basel III is the Tier 1
capital requirement, which is more expensive and is going to be
increased quite radically.”
This will inevitably push up the
cost of making loans and financing available, and the increased
cost will be passed on to borrowers. The impact on leasing will
also depend on whether lessors are bank-owned or independent.
George Tonks, partner at European
lease consultancy Invigors, says: “In the case of bank-owned
lessors, the banking group as a whole will need to maintain capital
for the risks of the leasing company.
The rules would work both at the
level of an individual bank and at consolidated level for a bank
group. This means that a bank will have to maintain capital as a
company, but the bank’s group will have to maintain a higher level
of capital for its consolidated position.”
In their feedback to financial
regulators, some European leasing associations such as Italy’s
Assilea and the Federation of Finnish Financial Services have noted
that leasing could be impacted if the new rules are applied at
individual level rather than at a consolidated level. Countries’
specific regulations will determine how this will affect leasing
In France, companies that offer
credit bail have to be banks. Similarly, in Germany since last
year, lessors are regulated as banks. In the UK, many lessors are
not banks and so would not have to comply with specific capital
requirements, although they would be affected if part of a bank
For independent leasing companies,
the impact will depend on where they get their money from.
“If they are funded by banks, the
banks will have to increase their margins on lending to them, which
means they have to charge customers more,” Tonks says.
Basel III will impact any company
involved in financing.
Gray says: “For any leasing
company, the costs are going to go up, either because the cost of
external borrowing increases or the internal funding cost – if they
are bank-owned – increases.”
The Basel accords set minimum
requirements, although national regulators are expected to set
higher requirements. As a consequence, in countries like the UK,
where the Financial Services Authority (FSA) has been somewhat
tougher in setting minimum ratios, the impact could be less tough
than in other countries which have not been above the minimum
Indirect effects on leasing could
also occur in the form of revised requirements for banking groups
having a majority stake in a leasing joint venture.
Historically, banks have been
allowed to count minority interest (the outside shareholders’
interest in majority owned subsidiaries) as part of their capital.
This is expected to change slightly, and a number of banks with
leasing joint ventures might need increased capital
As more banking groups adopt a
policy of focusing support to their core group customers, they
could make leasing an additional product for these customers, but
restrict how much they provide to non-core customers.
Tonks says: “Following the same
philosophy, some banks would also have core products, and those
products could be current accounts and loans, while leasing could
be an additional product.
“Therefore, if as a group they have
to restrict how much finance they are providing to their customers,
they may restrict it to what they see as their core product. This
could have an impact on their overall asset finance capacity.”
If there is less lending from the
larger banks, this could provide more opportunities for the
independent leasing companies.
“Demand for finance is still there
among SMEs,” Tonks says.
Some banks could see leasing as a
relatively more secure form of lending.
Tonks says: “There are banks that have moved from seeing leasing
as a peripheral product to a preferred product. They might prefer
having customers taking more leasing, because it gives better
returns than loans.”