As the market looks to tackle the “extreme outcomes” of Basel IV, the way the industry thinks about engaging with prudentially regulated entities is about to change, according to ISLA CEO Andrew Dyson.
The International Securities Lending Association (ISLA) has released its Securities Lending Market Report detailing the performance of the market as well as key focus points for participants.
In discussing the implementation of the Basel IV regime — which began its slow adoption on 1 January 2023 and is set to continue until 2025 — Dyson says not enough credence within the Basel IV rules is given to short-dated liquidity-driven businesses, including securities finance transactions (SFTs).
Dyson says: "The most recent proposal from the Fed in North America suggests that the largest banks will need significantly more capital to support the higher levels of reported risk-weighted assets (RWAs) than the revised regime will require."
The ISLA report reveals that this raises several important issues as “new capital may not be that readily available”.
Dyson indicates: “Investors may be less inclined to subscribe to new equity issuance, and growth from retained earnings can take years to reach the desired levels. In reality, we may see banks reducing or exiting businesses that are high consumers of RWAs.”
The Association is following these developments closely and will work with market participants and wider stakeholders in efforts to ensure that markets remain open and are able to provide liquidity — something that is the “lifeblood” of the capital markets, says Dyson.
