Basel III Benefits to Corporates Outweigh Costs, says Moody’s

The Basel III capital adequacy reforms could benefit non-financial corporates by creating greater stability in the credit markets and improving the banking sector’s ability to absorb shocks in times of financial and economic stress, says Moody’s Investors Service.

However, the credit ratings agency (CRA) cautions that companies could also face higher charges for banks’ services and find it more difficult or more expensive to borrow. Moody’s adds that it does not anticipate corporate rating changes that are specifically related to the phased introduction of the Basel III framework.

“The measures can be broadly viewed as beneficial to corporates, in that they will improve the banking system’s stability and could reduce the severity of credit constraints by banks over economic cycles,” said Carlos Winzer, senior vice president (SVP), corporate finance group, and a co-author of the report, entitled
‘Global Non-Financial Corporates: Liquidity and Funding Considerations for Corporates under Basel III’
.

“However, it could also mean that banks will increase pricing for their services or possibly leave unprofitable lines of business, while in some cases issuers could find it more difficult or costly to obtain debt funding.”

Moody’s has identified five areas where Basel III could affect relationships between companies and banks: arranging undrawn backup lines; accessing debt capital; managing surplus liquidity; arranging other banking products; and the concentration of banking relationships.

Under the changes, it could be more costly for banks to provide stand-by credit facilities because of the higher capital charge and the need to maintain greater liquidity. Banks could become more selective in committing to corporate debt transactions in some situations. Companies could also find holding large cash balances more expensive as Basel III liquidity and stable funding requirements create disincentives for banks to take short-term wholesale deposits from corporates.

It will take time for Basel III’s effects to emerge because the changes will only be introduced gradually and they are being brought in at a time of accommodative monetary policy in many countries, the report concludes.

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