The two bits of regulation are at tension with each other. One bit is saying you should have more funding with a longer duration and the other is saying watch out when buying this stuff if you are an insurance company. It’s a big problem for banks.”
-Simon Hills, an executive director at the British Bankers’ Association
Why all the sturm und drang about bank capital? A recent report from McKinsey (?) stated that current business models project European banks “will have a long-term liquidity shortfall of 2.3 trillion euros in eight years.” That’s equal to half the banks’ total capital and liquidity deficit under Basel III. For comparison’s sake, the U.S. banks’ deficit is 2.2 trillion euros.
Enter “European Union’s Solvency II regulations.” These are supposed to be implemented in 2013. The rules create a conflict between insurers, who tend to buy bank bonds, and banks, who need to raise capital.
“European banks are being forced to sell more long-term bonds as regulators seek to prevent another financial crisis. European insurers say their own regulator will stop them from buying such debt.
Basel III’s liquidity rules mean European banks may need to raise as much as 2.3 trillion euros ($3.2 trillion) in long-term funding, according to New York-based McKinsey & Co. Insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds under the European Union’s Solvency II rules, which makes them more expensive to hold.”
Even without new solvency rules, bank regulators seem to be struggling to entice insurers to buy new bank bonds. Given how well bank management has managed risk the past decade, can you blame the lack of appetite on Insurers?
This issue is likely to impact numerous other issues — the end of ZIRP, regulatory changes, banl capital rules, even FASB 157 — may see the impact of these bank capital rules . . .
European Bank Funding Threatened as Basel III Meets Solvency II
Bloomberg, March 29 2011