Traditionally high street banks serviced the sub £5m commercial investment loan sector but over the past 10 years they have been vacating this space and alternative lenders have been taking market share. One of the many reasons is that banks are struggling with new capital requirements which fall under the less understood Basel III regulatory framework which includes two unprecedented initiatives which take aim at the issue of liquidity, rather than just capital.
Both measures are direct responses to the freeze in the short-term interbank lending markets in 2007 that left banks, from Northern Rock to Lehman Brothers, relying on minimal liquid assets to support a mountain of short-term obligations.
The net stable funding ratio looks at how much of a bank’s long-term assets (defined as having a maturity greater than one year) are funded by long-term finance, short-term finance, customer deposits or equity.
Importantly, short-term wholesale funding – such as certificates of deposit, commercial paper or overnight deposits from other banks – is completely excluded from this breakdown.
Meanwhile, the liquidity coverage ratio measures the level of highly liquid assets, such as government debt, the bank has on hand to meet its average 30-day obligations.
As these ratios are being introduced for the first time from 2015, banks simply have no choice but to hold a greater volume of liquid securities against the risky assets on their balance sheets – reducing their capacity to provide more capital intensive or longer-term lending.
Commercial property investment lending is both capital intensive and longer term, a double whammy for the banks, leaving the door open for alternative lenders.
Photo by Eduardo Soares on Unsplash
