Call for Easing of Credit Rules from HSBC and Barclays

British banks are becoming increasingly disadvantaged compared to their American rivals in the private credit market.

The private credit market is increasing every year, thanks to lighter regulations for private credit groups such as Blackstone, Apollo, and BlackRock. Most of these groups are American-based companies. According to research by consultancy Alvarez & Marsal, 140 billion dollars of capital is forecasted to be released following signals of an unprecedented easing of key banking rules from US regulators.

Private credit is non-bank lending, typically to middle-market companies, which generally range in size from 25 to 75 million dollars in EBITDA. Private credit groups usually provide loans to mid-sized companies that often do not have any credit rating. Because private credit funds are subject to softer requirements than banks, especially when comparing US and UK regulations, they can offer cheaper rates to their clients.

The so-called “lighter regulations” mainly relate to risk-weighting rules, which are crucial in determining the capital required for various types of loans depending on their risk level. Michael Roberts, head of corporate and institutional banking at HSBC, raised this issue at a House of Lords committee. He said that when HSBC provides loans directly to small or medium-sized companies, they are based on a 100 percent risk weight. However, if the same credit were given through private credit securitization, the risk weight would be only 20 percent.

Stephen Dainton, head of investment bank management at Barclays, also emphasized the importance of the growing scale of the private credit market for the regulatory framework. Due to this trend, there may be significant changes to the Basel agreement, which consists of international banking regulatory rules developed to ensure banks maintain adequate capital to absorb unexpected losses, in several nations. The UK and EU are waiting for the US decision on revisions to the Basel Accords.

In summary, the growth of private credit and the softer regulations applied to them, especially for American firms, put British banks in an unfavourable position in the loan market. Executives from both HSBC and Barclays urged UK regulators to ensure fairness for British banks against their American competitors during the House of Lords meeting.

References:

https://www.investopedia.com/terms/b/basel_accord.asp#:~:text=The%20Basel%20Accords%20are%20international,capital%20against%20risk%2Dweighted%20assets.