Monday, November 28, 2011

How International Banking Works

For a company to become adept in International banking it has to be well versed with international transactions even before exploring the available finance options. The rate at which a bank can also interact on an international platform is also necessary. There are several finance trade products for companies trading on the international frontier.
One of these is the letter of credit which helps the seller to ascertain that payments have been made. Once this letter has been received from the bank, the exporter gets a confirmation that payment will be made by the importer. This is the means through which the bank guarantees that payment will be made. If for unforeseen reasons an importer fails to meet the terms and agreement on the payment, the bank then steps in and makes the payment. This is the in which the exporter makes performs risk-free transactions through following these stipulated terms and conditions.
Any international bank should be well aware of all the specifics of international financing. There are some companies that prefer using banks that issue letters of credit online. This is one way of speeding up transactions since the exporter is able to get the letter of credit promptly and therefore goods can now be released to the importer since the bank has guaranteed the payment and therefore does not cause the unnecessary delays in the export and import process.
International financing is so crucial since one wants to ensure that they get the favorable terms available. The bank in which one makes transactions should allow one to available finance options available for exporting goods. International banks are in most cases preferred because of number of reasons such as tax avoidance in what many know as offshore banking, which is not necessarily illegal but one should always be aware of the hazards that come with international banking.

Benefits of Using an International Bank

Hong Kong is one of the areas in China that is well known for its good banking infrastructure and there are several benefits of using the financial services offered in the place. One of the factors that make this industry very popular is the fact that there are no restrictions when it comes to the flow of funds in bank accounts.
Privacy is a great concern for people when they are opening accounts. With a Hong Kong bank account, your identity and details about the transactions you carry out remain confidential. This is the same privacy you get with some of the countries that offer offshore accounts.
When you open an account with a Hong Kong bank, there is no risk of having the services terminated. This means that nobody can interfere with the banking services you receive especially if you have an offshore account.
If you have an account in any of the banking institutions, it can be located in any of the offshore islands in the region but you do not have to travel there to open one. This makes it very convenient for customers.
The minimum account balance in the region is lower compared to other cities in the world. You can have as little as HK$ 3,000 as your minimum. A small fee is charged if it is below this amount.
Another benefit is that if you are running a Hong Kong corporation, you can withdraw or deposit your money from any branch. Wire transfers are also possible if you have an offshore account.
Account opening is not restricted to nationals therefore foreigners can enjoy the various financial services offered in the area. This means that if you are running an offshore company, you can have an account but in this case, the banks require a majority of the shareholders to be foreigners.

Basics of International Bank Transfers

Today, we cannot think of a life without banks. They have become part and parcel of our life. Today's new generation banks provide lot of useful services apart from just lending and saving of money. These developments along with development in technology have improved the banking sector along with its service across space and time.
Bank to bank transfers, whether national or international are becoming more and more popular among the layman due to the unparalleled safety and security that is being offered in such transfers. These transfers can be completed within a couple of hours generally. The transaction will be done only if the sender has enough funds in his account and once it reaches the bank at the receiving end, it will be cleared immediately and can be easily accessed. The banks at both the sending and receiving ends must have reciprocal accounts with each other or the transaction will have to be made to a corresponding bank which has a reciprocal account.
International Bank Transfers are not possible without the SWIFT or BIC code. You must be wondering what they are. SWIFT code stands for Society for Worldwide Interbank Financial Telecommunication also known as ISO 9362 or SWIFT BIC or even BIC code of SWIFT Id, which is the standard format of Bank Identifier Code. This is approved by the International Standard Organization (ISO). This code is an alpha - numeric code which uniquely represents a bank. This code is used for interbank transfers and other interbank communication.
How Does It Work?
Firstly, the sender has to approach the bank or whichever financial institution he wants to send the money from. The recipient's account number and the SWIFT code of that particular bank where the recipient has the account also should be given to make the transaction.
Then the bank at the sending end will send a secure message to the bank at the receiving end, requesting the payment according to the given instructions.
Generally, it takes only a few hours to for the transfer to be complete and the funds to reach their destination account. But at times, it might take a couple of days.
All the bank transfers collect payment for the service done by them from both the sender and the recipient. The bank at the sending end collect the free from the sender whereas the bank at the receiving end deducts the fee from the amount transferred, which means that the amount that the recipient receives will be lesser than what the sender had originally sent.

International Bank Transfers Are Simple Transactions

Many people have never tried to do an international bank transfer of funds for any purpose. It is now time to become familiar with this type of transaction for a couple of reasons. More and more products are being sold on the internet and many of the companies are located overseas and internationally. If the vendor does not have the means to process credit cards, then international bank transfer will have to be the mode of payment. Another good reason to learn the process is if you have family or friends living abroad, working abroad, or in the military overseas.
International bank transfers are very common transactions that most banks are set up to handle very easily. There will be fees involved when using the international bank transfer transaction so it pays to shop around for rates. The bank you bank with may be able to give you the best rate on fees. Once you have determined the bank to use to start the process, you will need three important items. They are: IBAN (routing #) of the receiving institution, the account number of the person or business you are transferring funds to, and the name and phone number of the account holder. This is the information that will be required by the receiving bank.
You will have to provide your bank, or the sending bank, with some important information as well. You will have to provide valid identification and that will include current address and telephone number. Be prepared to be asked why you are doing the international bank transfer. In today's world of drug trafficking and terrorism, large sums of money being transferred draw attention. The higher the dollar amount you are transferring will necessitate your providing more extensive reasons why with the documentation.
Once you have satisfied both sides of the transaction, the international bank transfer should go through without a hitch. Be sure and do some post transfer housekeeping. Make sure you are given a receipt and any other applicable paperwork that may have been required in the transaction. The receipt should have a transaction number and tracking information in case you need to track your transfer. Your receipt will prove that you actually sent the funds.
There really is no reason why you cannot feel as secure about an international transaction as you do with local transactions. We do live in a global economy now.

International Bank Transfers Explained

An international bank transfer is a way to send money between two countries. These transfers can be done in several ways. One way is a wire transfer. To send a wire transfer the person does not need to have an account at the bank which is transferring the money. The application can be made at the foreign exchange counter of the bank. This is usually a very quick and efficient way to transfer money internationally and it should only take a few hours or a day to process.
A wire transfer is a bank to bank transfer and is the safest way to send money internationally as the person sending the funds and the one receiving it must show a proof of identity. This is then copied and kept in the banks records. When the money is transferred electronically, the information is also encrypted so nobody can intercept and steal personal information. The two banks providing the international service must have a reciprocal account with each other to be able to facilitate the transfer.
The fees charged when making an international bank transfer can be difficult to calculate as some are not very obvious. The main fee incurred is the fee charged for sending the money. This fee is paid at the bank when making the transfer and the amount charged will differ from bank to bank and country to country. The bank transferring the money also makes a profit on the exchange rate as it will send the funds in the foreign currency you request. The last fee is paid by the person receiving the funds and is paid when collecting the money from the bank. This fee will be subtracted from the amount received.
A system developed to transfer funds internationally between banks is called SWIFT. When you transfer money internationally you will be asked for the bank account number of the recipient as well as their SWIFT number. This information should be easily accessed from the person's bank or their bank statement. Other information the bank will require when making the transfer application is the recipient's address. You should have all information the bank requires ready before going to the bank to make the transfer.
International bank transfers are available from almost all banks. When transferring to an overseas bank account you will need to find a bank in your location which has a reciprocal account with the overseas bank. Make sure you have all the account and address information of the person the transfer is being sent to before you go to the bank. The application is quite simple if you have everything ready before hand, and should only take a few minutes.

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Sunday, November 27, 2011

International Bank Wire Transfer

 Money is transferred across continents daily. People living abroad send money to their relatives who live in their homeland. Foreign Companies with people working all over the world sends in the employee's income through money transfer procedures. Thus money transfer is something that is done on a wide scale and on a daily basis. There are many ways to transfer money across the world. The money can be transferred into the bank account of the account holder and the account holder can withdraw this money whenever he needs it. But the safest and most popular international bank transfer is the wire transfer or credit transfer system. It is an electric funds transfer from one person or institution to another. It is also possible to wire money from one bank account to any other bank account. Cash transfer is also possible at various designated cash offices. Wire transfer is aimed at individual money transfer rather than a bulky payment, which is companies, will not wire group payments by wire transfer. The money is wired to an individual account holder by any other person or institute.
Wire transfers are considered to be the safest and most reliable means of transferring currency. It is also one of the quickest ways to transfer funds from one person to another. The person who wants to send the money goes to a bank or an exchange office that takes up the job of wire transfer. The details of the transfer which includes the receiver's name, bank account, amount, city and country codes are filled in and submitted along with the sum to be transferred. The bank or office that sends in the cash transfer charges the sender a processing fee. This fee depends on the amount being sent and is charged to the receiver too. The sending bank then contacts the receiving bank and furnishes it with the details of the transfer and details of the receiver. The transfer can take a few hours to complete and in some situations a day or two. If the currency needs to be converted then the exchange rate is calculated and commission is cut on the amount before sending it into the bank account of the receiver. The receiver's fee is charged on this amount and he or she receives a somewhat lesser amount than the actual amount. In this way international bank wire transfer makes up the profits and generates its funds.
Another form of wire transfer is the use of debit cards and credit cards. The electronic code on the rear of the card is inter connected with the bank account and every time it is swiped at a store the e-code sets up a wire transfer between the card holders bank account and the stores fund account. Thus wire transfer is a commonly used aspect of daily life and one of the best ways to transfer currency in an international point of view. International bank transfers are gaining popularity with time and will soon take a high point in the field of banking.

Thursday, October 13, 2011


After a sojourn to reflect and refocus on developments, what are the questions that dominate the political ether? The question I hear most often socially: "is the government (US or UK) doing the right thing?" My answer is a confident YES. Then I say "but both US and UK governments are failing to paint a clear picture of what they are doing and precisely why!"
see also:
Republicans in the USA and Conservatives in the UK are successfully twisting the issues to make recession and banking crisis appear domestic political failures. This is most telling for the UK's Labour government with a general election due in less than a year from now. But it has to be clear to intelligent observers that the UK's position is only to be expected and remains prudentially sensible as a proportionate set of responses to the crisis. PM Gordon Brown has maintained a stance that in effect says "trust me (us) to do the right thing to get us out of this crisis." The general public, at least the political chattering class, wants detailed explanations, not abstract assurances. The Conservative Opposition, echoed by the Liberals, have in the media created the axiomatic assumption that "public finances are in a mess." There is tremendous anger about banks and bankers, but the effect of ya-boo politics has been to divert anxious blame onto the government. Reading UK media the impression is gained that the UK's public finances and national debt must be the world's worst, if even no-one is quite sure what precisely defines concepts like 'finances in a mess'. Note the example of the following table. This reviews the financial debt of countries relative to GDP. There is a misnomer in the 3rd column (private sector debt) which is really household debt only as may be surmised in any case from column 7 of total bank assets (total loan gross exposures, not domestic only) given that public sector element is typically about half ratio to GDP with a few exceptions. There is a concerted forgetting that UK private sector gross debt over the past decade grew from 3 times public sector debt to 6 times public sector debt (3 times GDP) while, until the crisis broke, public sector debt held steady and fell slightly. Now the general public are being daily made anxious about the government fiscal deficit and medium term prospect of tax rate rises, most recently by the NIESR report on the economy, which fails to take account of the feedback effects of saving the financial sector. see the following:
The NIESR has adapted the average recovery for previous recessions to state that incomes will not recover to the pre-crisis level (in real terms before unemployment rose and GDP experienced negative quarterly growth) until after 6 years. This is merely the average peak-to-peak period but has been exaggerated in the media as if a damning indictment of someone or something, similarly that GDP rates forecast are worse than the last published government figures (March Budget)? Yet, in fact there is nothing shocking or surprising about this. What is surprising is the NIESR's assumption that with a lower pound growth recovery will be export-led i.e. a total reversal of the credit boom growth previously! This assumption is conditional on whether government efforts to persuade or force banks to maintain or even increase lending will be effective, especially via the public sector owned banks. A very similar view would apply in the USA. What seems remarkably gauche about this outlook is that both UK and USA remain magnets for other countries foreign exchange surpluses. There is an improvement in growth expected for both insofar as the external account trade deficits will narrow as export-surpluses countries trade surpluses shrink, but this is not a recipe for halting unemployment rises. That depends on fiscal boosts and the banks cushioning the shrinkage of credit (deleveraging by banks to thereby most easily restore their capital ratios and by borrowers, especially households, cutting back their spending). Only restoring some credit boom effect and regaining confidence will slow and halt the domino, knock-on, rippling, or however anyone wants to describe it, negative vortex of beggar-my-neighbour impacts through the economy and all economies.
The banks have not woken up and smelled the coffee of their collective responsibility for economic recovery alongside government; they continue to live with pre-crisis mindsets, witness their inability and extreme unwillingness anyway, to tackle the bonus-culture. Government (UK and USA) have also not spelled out clearly enough what the banks are obliged by government to do to help both themselves and the economy. Lloyds Banking Group, for example, has improved its capital ratio to over 14% but mainly by reducing its risk weighted assets (loans) by nearly 40%, of which half was gained by an asset for BoE cheque swap with the Bank of England! The remaining half of the deleveraging is largely by retiring loans and not rolling them over. The effect of this alone in the case of but one bank has a 1% negative ratio to GDP and a GDP impact of possible minus 0.5%. Compounded by deleveraging by other major banks and we have a negative pro-cyclicality effect, precisely what banking regulation Basel II is most concerned to identify and avoid! Is the government forecasting or that of NIESR or any other model supposed to have predicted this? Governments created something of a cleft stick here, on the one hand wanting to see their financial interventions repaid soonest and on the other seeking assurances that the banks would maintain substantially more than minimum regulatory capital reserves and also maintain lending at pre-crisis levels. These objectives if not sensibly timed become mutually exclusive!
It is not hard therefore to conclude that what is less important right now is what caused the crisis and more important is what are the banks doing today? They are making the recession deeper. Bankers have an ready culprit they can blame for causing pro-cyclicality, the Basel II capital adequacy regulations, which ironically were designed with the objjective of addressing precisely this problem!
The banks still look at the underlying economy as exogenous to their business performance, not as something intrinsic that they can directly effect. They have as yet not embraced and understood Basel II Pillar II stress testing and economic scenario analysis and the central banks, government, and economic institutes like NIESR are not offering guidance and tools for how to analyse better the role of banks in the economy!
The banks are currently in a period of retrenchment, recoiling like scalded cats in the face of public sarcasm, and therefore unable to take responsibility alongside government in concerted efforts to redeem the economy. The public debate continues to confuse symptoms and underlying disease. The banking crisis may have had viral-like causes that transmitted throughout the whole financial system, but the public, led by politicians, media and pundits, continue to primarily blame all major banks as if they are individually guilty or heinous excessive risk-taking, even though the collective guilt is also obvious. Some pundits say we should have let individual banks fail absolutely as if diseased parts of the body-financial could be cut out to let the healthy parts prosper. This is myopic at best and ego-mania at worst, every cloud has silver linings for some whether short-sellers or doom-monger talking-heads.
Of course, what is it I'm saying here other than we need more comprehensive clarity delivered to the general public. How easy is that? Not easy at all. Opinions like politics are a market-place. After 2 years of the most intensive news coverage given to any crisis including war coverage, is the general public more attuned to detailed technicalities of what is happening and why, and what is being done, and what should be done, than before? Where can the public plant its feet and say this is real?
Timothy Geithner recently visited Alistair Darling but they failed to use the meeting adequately. They, both of their governments administration, need each other to validate each other's fiscal responses to the recession and financial interventions to salve the banking crisis. But, it is clear they don't quite get that. No one trusts bankers and only reluctantly trust economists. Politicians are generally mistrusted. Therefore this only leaves the inter-governmental sphere where mutual validation and confidence may be gained. My perception is that there is considerable confidence at this level, but it is not being communicated. In part this is because it lacks the tools for the job to analyse policy interventions sufficiently to know the timing of when to expect the positive benefits of policy measures to become apparent, by which I mean both finance sector interventions and budget fiscal deficits. The US and the UK are in recessions that are 6 and 4 quarters ahead of others, and consequently their fiscal deficits are higher and broadly in agreement. Politicians are sensibly wary of creating hostages to fortune, however, in making economic projections of qhen their actions should have positive results. This was a similar problem for central banks when trying to issue warnings ahead of the credit crunch, too wishy-washy elegantly shredded into lumpy bit kind of advice, with on the one hand and on the other etc. If there is one experience to be warned about I gained working in banks and as an economist is that too many people in key risk management positions are more risk adverse about their own careers than capable of setting this aside to state clearly what they believe. That said, it is doubtful that any major bank's board had it received cogent and accurate advice in say 2006 or early 2007 mapping out precisely what was about to hit them, would not have had 'shot' the bringer of bad tidings, at best had him or her dragged off to the funny farm. Economics is for various reasons, including bonus culture ones, something that most top bankers resist like the plague, whether qualified in banking or as is equally commonplace not educated about the totality of banking at all. Economics is sobering and not what inebriates can tolerate if given the choice? Perhaps polticians and central banks should take a leaf out of how wartime leaders such as Roosevelt and Churchill dealt with matters of public information and military command when they recognised that confidence mattered most combined with well-judged honesty in appealing to all to do their utmost in these difficult challenging times, etc? The recession and financial crisis is not a place for simply saying "I am your leader so trust me!" Time for more political courage, to step up and say that to the best of our judgment this is what we believe and deliver confidence-boosting expectations and take the political risk. The opposition political parties similarly need to be seen to stop playing party politics on the issue of getting out of recession and the credit crunch crisis. There are plenty of other matters they can be sarcastic about. Obama attempted in the US to gain a bi-partisan approach on the crises. he only half succeeded. In Europe, it seems to me that bi-partisanship has not even been proposed as a necessary or useful way forward! In the UK, Labour is pinning its hopes on being seen to have steered the economy through the recession. That has no precedents as a political strategy that I can recall. Better would be to simply go for honest statesmanship in the interests of what works best to restore public confidence in what it is that politicians are supposed to do best and most responsibly?
Geithner stated on 13th July that there is a good chance that the U.S. and other leading economies will start growing again over the next two quarters, but there are still significant risks to the outlook. This chimes with UK views (Government and NIESR) that there will be positive GDP growth in 4th quarter 2009. Essentially, this is based on narrowing of the external account and past recessions given that UK and US have both now reached the end of previous average recession periods, with one overlooked aspect that is that UK recovery tends to occur 2 quarters after the US, hence do not expect UK positive GDP before next year! Furthermore, both the official assurances of UK and US governments have been made without analysis of the cycle impacts of what the banks are doing. Their respective national economic models lack that depth; they cannot model for the details of the financial sector statistics within their GDP forecasting models!
Geithner said, "In my view there are still significant risks and challenges ahead," Geithner said when asked if he was concerned about the possibility of a double-dip recession. The issue is less double-dip in my view than simply 'double' given that the financial crisis is doubling the depth of what would have been a more normal to-be-expected recession. He said the world's major economies were largely in agreement on the steps that needed to be taken to boost economic activity. Yes indeed, but hard to guess that from statements by politicians except when speaking under the G8 and G20 umbrella. "I think we have remarkably strong consensus in place on core elements," Geithner said. This is not strictly true on the face of data, but is as good as it gets. He was speaking after talks with UK's Alistair Darling as part of a trip that will take in the Middle East and Paris. Geithner and Darling said leaders of industrialised nations would discuss the measures they are taking when the G20 meets in Pittsburgh in September. This is a critical month for the USA when its annual government budget ends and a new one has to be announced and voted through Congress. The number of state interventions in the banking crisis has slowed compared to last year. Everyone is treading water waiting to see what happens to banks balances by the end of the second quarter to then gauge what the US especially will decide it needs as a fiscal boost after September and in off-budget fiat (money market) interventions and command economy edicts to the banks. By then we should also have the measure of Quantitative Easing plus government bond auctions and we will probably be in the maelstrom of another nervous stcok market fall. Geithner will seek to reassure Gulf Arab states this week that U.S. dollar assets they hold in large quantities remain a strong investment. This is bolstered by scare stories about the Euro trillions of toxic debt in the Eurozone. On the one hand a strengthened dollar and weaker Euro should add to containment on oil prices on top of fall in demand, on the other hand there is a strong motive by foreign investors to anticipate another dip in US equity and asset values. A recent decline in Saudi foreign assets shows the purchase of U.S. Treasuries by Washington's Gulf allies, five having currencies pegged to the dollar, at levels seen in the past decades should no longer be taken for granted. This reflects narrowing of the US external account, hoiwever, and is not worrisome since the US, like the UK, now want their government bond new issues to be bought by domestic buyers, principally by the banks. The banks may foolishly insist on quid pro quo: "we'll buy your debt if you lessen the pressure on us to maintain lending levels and let us deleverage further!" Negative growth pro-cyclicality by banks has some way yet to run. If we take our best bets on this from past recessions, expect the banks to continue shrinking their household and corporate loan books at least up to the 3rd quarter of 2010!

Wednesday, April 20, 2011

Property lending and rules to save banks from themselves

Millions are frustrated because banks wll not lend them money to buy or develop property. Banks ascribe their lending restrictions to the new "Basel III" capital requirements (effective in 2012). This is not strictly a valid reason. Borrowers and others are given such simple reasons because the total picture is fraught with difficulties in striking the right balance between opposing demands, dogs and fire hydrants, rock and hard place etc. What is going on, or not?
Banks are shrinking their balance sheets and that inevitably means property lending (70% of UK and USA banks' customer loans - after exclusing loans to rest of finance sector which are also shrinking) and also hoping desperately to sell on bundles of property loans and foreclosed properties, if only they can find long term deep pockets to sell to without too steep a discount.
The retreat by banks from property is one reason why insurers and other institutional investors are getting into property lending, seeing an opportunity to do so without competition from banks and expecting higher returns than the banks can achieve.
The bankerspeak financial technicalities.
Basel III changes to higher capital reserves and more core capital of banks (higher amounts and higher loss-absorbing quality) are not genuine reasons for reducing the general loan exposure - it is really about narrowing the funding gap (between deposits & loans) that is filled by selling Medium Term Notes into the "wholesale interbank funding market" and banks are each fearful of when they next have to go to market to replace their MTNs on maturity (big amounts periodically every 3,6, 12, 18 months etc.).
"Internally generated capital" is recovery of monies loaned plus net interest income and other realised profits, and the banks are torn between using those gains to reduce their funding gaps or to increase their capital and liquidity reserves (as regulators under the name of "Basel III" require). They are also torn about how much they can allocate to bonuses rather than dividends. Hence, the banks blame Basel III for lower lending and want everyone to know that as part of their pressure on regulators and governments to soften or postpone Basel III and even on shareholders re. dividends and government and other pref bond holders to expect lower % coupons for longer - when actually it is really about narrowing their exposure to wholesale lenders i.e. to severely reduce their funding gaps, which UK banks have already halved from £1 trillion to £500bn, and falling, and that is a lot of balance sheet liquidated and internal capital generated.
The banks know the wholesale funders well and what is looked for an expected because they are also such funders in terms of their large loan exposures to other financial sector borrowers and have been liquidating cross-border interbank loans dramatically.
When (how soon) a bank has to next replace/refresh its "funding gap" finance will dictate its current openness to agreeing new loans; they are keen to say to their funders here is £5bn matured MTN repaid to you and we only want you to roll-over and buy £2.5bn of new MTNs back from us, which is supposed to sound good to the lenders and there should therefore be minimum fuss or embarassment (narrower spreads) that could leak out to market and damage the share price.
Property (development especially) is seen as riskier, and in addition UK banks are being warned by regulators to reduce the concentration of risk they hold in this one sector (property), especially while they are holding large amounts of receovered property collateral and seeking to sell on about 20% of their property loans (i.e. £260bn), probably with 15% haircuts = £40bn, some % of which could appear as paper loss relative to the outstanding loans, interest & charges that relate to the collateral recovered, perhaps £5-10bn (a wild guess).
The banks are in a bind partly of their own making insofar as the property market (asset prices) cannot recover until new property lending grows and yet until there is recovery they cannot sell their property exposures without risk of substantial loss, and without clearing out of a lot of property they cannot resume property lending.Therefore, if institutional investors (who are the major shareholders in bank other than governments) step in to make up the shortage in new property lending this, if on a large enough scale, could be important to breaking the logjam, and should be profitable to institutions in two ways (for themselves directly and via improved balance sheets of the banks), and given that property conditions are a major aspect of economic growth recovery.
But, when property lending is resumed by banks more assiduously the first port of call may be to refinance troubled loans rather than agree new loans to new borrowers, that is long term loans especially, while short term lending only looks relatively attractive to many banks. Medium to long term lending appears to have too many uncertainties i.e. the risks are very hard for them to compute.
The wider context includes policy that is torn between being seen to put in place measures that can be claimed to make sure the credit crunch recession never re-occurs, while also needing bank lending to stop shrinking and then to grow to generate more certainty of substantially higher economic growth. This facing in contradictory directions is why there is much fudging about the impoact of Basel III regulation including the Vickers Commmission recommendations that many outside UK as well as in UK hoped would provide a clear new line to follow and refresh the impetus of the G20 agenda of about 100 adjustments, policies and new institutions to protect the financial system from itself.
So-called "Basel III" rulings aim to increase banks’ tier 1 capital base from 2% to 4.5% (ratio to gross loans, or twice this to risk adjusted loans) to improve the resilience of banks. These discourage securitisation transactions, and there are four ways banks can increase their capital base to meet new ratios: raise more long term capital themselves (internally generated by cutting costs, bonuses, dividends and coupons), raise more in deposits, shrink loan balance sheets, commit less own capital to investment banking (market trading & derivatives), and reduce exposure (in economies where property dominates) to property and property loans.
There is the hope that interbank lending and funding gap finance and securitisation of loanbooks will sooner than later return as a reliable and substantial option, but only once the banks look safer bets i.e. the banks are strong enough to again dictate the loan spreads to those they borrow from. That is unlikely so long as the sovereign debt crisis reflects badly on banks and so long as Basel III looks hard for banks to comply with, even if these are very much parts of the banks own PR to shift the blame (playing up the sovereign debt crisis) and to soften new capital rules (foot-dragging on Basel III).
From the point of view of individual borrowers going to the banks with wonderful schemes of great quality all this bigger picture about future impacts reasons given for refusing loans is an immense frustration. It is actually the excat inverse of the pre-credit crunch past when banks ignored the bigger macro-economic and regulatory picture and approved any loans that passed merely microeconomic tests based on past high growth experience and not on forecasting future downturns. Yet, while the medium term future should be one of renewed growth and recovery, Basel III is ensuring future risks are assessed in terms of possible repeat of economic down turn (double-dip or another recession)!
In the case of seeking loans from banks that are underwritten or otherwise backed by government should ensure that banks can lend comfortably because the risk is low. But, low risk also means low net interest income when banks are anxious to raise their % net interest income, and given uncertainties about even government finance (subject to unexpected renewed cost-cutting at budget time) state-support may not of itself be sufficient to get the banks to lend. Institutional investors seeking to fill the gap also may not be attracted sufficiently by the low margins despite state guarantees. They are attracted by commercial property, not residential, and are not stepping into property lending because they are attracted by low margins of bank lending. Insurers are attracted by the higher interest income generated by commercial property loans compared with government bonds.
Over half a £/€trillion in commercial property loans are maturing in C.Europe over next 3 years and possibly a third of that additionally in the UK. Institutional investors will step in where banks fail to roll over what is of good quality and cannot be all repaid, and are already now financing about one quarter of comemrcial property lending.