Top of the Street: The regulations that could reshape banking. Again.

BarCap on this month’s new draft banking rules, and the NY Fed on how policy is affecting credit, home prices and leveraged lending. Just a few of the notables from the last week of research from Wall Street, the Fed and beyond.

 Banking: The regulations that could reshape banking. Again.

 The banking business changed again this month with the release by regulators of new draft rules on liquidity, setting up fresh obstacles for bigger banks and new advantages for smaller lenders and independent broker-dealers. That’s according to analysis last week by Barclay’s Brian Monteleone, Jeffrey Meli and Daniel Lang.

Banks with more than $50 billion in assets will need to hit a new net stable funding ratio (NSFR) by January 1, 2018. The rules change the value of different sources of funds and the cost of assets that need funding. The competitive advantages and disadvantages for banks of different sizes promise to shift as the rules take effect.

The proposal from the Fed, FDIC and OCC requires bigger banks to have enough stable funding to last a year. Banks will have to calculate available stable funding (ASF) by scoring the availability of different kinds of funds. Capital and funds with a year or more to maturity get scored at 100%, for instance, while insured retail deposits get scored at 95%, corporate operating cash at 50% and brokered deposits at 0%. Required stable funding (RSF) will depend on the bank’s assets. Cash gets scored at 0%, for instance, with Treasury debt and similar liquid assets at 5%, residential mortgages at 65% and most other loans at 85% or higher. For banks with more than $250 billion in assets, the ratio of ASF to RSF has to be 1 or greater. Banks between $50 billion and $250 billion have to meet a modified requirement that cuts the RSF by 30%.

The rules could drive a new pricing wedge between banks above and below the $50 billion and the $250 billion marks. For commercial banking, the rules make bigger banks’ retail deposits much more valuable than corporate and brokered deposits. Credit cards and mortgages look easier to fund at bigger banks than other consumer loans or corporate loans. Securities look relatively easy to fund. That could give big banks incentive to price retail deposits aggressively and cede other kinds of deposits to smaller banks or investment funds. Big banks could also price credit cards and mortgages aggressively, with smaller lenders having an advantage with other loans.

For big bank broker-dealers, traditional funding of trading and repo books would create a huge NSFR shortfall, according to Barclay’s analysts. Big bank broker-dealers could overcome some of the shortfall by issuing long-term debt, but that would raise the cost of the trading business significantly. The cost of running a repo book could also go up since regulators see even the overnight loan of cash against collateral as carrying an implicit relationship obligation to renew the loan; the repo loan consequently gets a 10% score for RSF. The new rules could give an advantage to independent broker-dealers not subject to the NSFR.

The Barclay’s piece is NSFR: Implications for Loans and Liquidity, May 19, 2016.

Banking: The policy drag on credit and home prices
Government policies to rein in banking risk have cut annual growth in bank credit in recent years by as much as 1.5%, housing credit by 2.5% and home prices by 1.5%, according to a study recapped last week by the NY Fed. The study looked a policy changes in 57 countries and estimated their impact after accounting for GDP, monetary policy and financial conditions. The analyst then estimated where bank and housing credit and home prices would be without policies that tended to focus on housing. See the NY Fed’s Liberty Street Economics blog.

Banking: Whack-a-mole in leveraged lending
When bank regulators started firing off warnings in 2013 and 2014 about loose leveraged lending, it got results, according to a post last week from the NY Fed, although not completely the results intended. The warnings did lead to a drop in leveraged lending as a share of corporate loans. But most of the drop came from the 16 large banks and insurers under the closest scrutiny from the Fed. Their leveraged lending tumbled while activity at other banks and at nonbanks kept right on rolling. In fact, nonbanks increased their borrowing from banks, possibly to finance their growing leveraged lending books. See the NY Fed’s Liberty Street Economics blog post.