[co-authors: Giulia Geraci, Alessandro Nicolini]
The latest Consultations launched by the European Banking Authority (EBA) and the Bank of Italy on regulatory capital requirements for banks may lead to opportunities for alternative lenders, as traditional financiers may face increased constraints and funding costs in certain industries or jurisdictions.
On 29 April the EBA launched a Consultation on the technical standards to assess the risk weights and minimum Loss Given Default values for loans secured with real estate.
On 28 April, the Bank of Italy published a Consultation focused on :
- the introduction of a systemic risk buffer (SyRB) for banks and banking groups authorised in Italy. The SyRB is envisaged by the EU Capital Requirements Directive and the Credit Risk Regulation, to counter risks which are not addressed by the other capital conservation and countercyclical buffer regulations. This topic was addressed in the EBA's guidelines EBA/GL/2020/13 of last September, and
- Borrower-based limitations for new loans, tailored to the conditions of specific clients, industries or regions. The Bank of Italy has proposed limitations in the form of:
- loan to value ratio;
- loan to income ratio;
- debt to income;
- debt service to income ratio;
- debt to assets (leverage ratio);
- limitations to the overall term of loans; and
- requirements as to loan amortisation.
This development is not derived from EU legislation, meaning that these limitations would not be harmonised across the EU Member States, although these steps were both recommended on an international level by initial solicitations issued by the International Monetary Fund in March 2020.
The focus on banks' capital requirements in the face of systemic and other risks is not surprising at this point in time, as the market and regulators prepare for the aftermath of COVID-19. Of course, any new or increased capital requirements will affect the banks' ability to compete in the lending market, as the public subsidies and government support implemented by special legislation in the past few months will fade away.
In particular, limitations on the amount which can be lent to individual borrowers dependent on their individual circumstances is a major proposal.
Whilst it is difficult to predict the outcome, the Bank of Italy's Consultation could shape the Italian loan market significantly, with wide-ranging impact on various regions or industry sectors, and a possible effect on lenders' appetite for credit risk in the various phases of the economic cycle. Certain borrowers may see their access to bank credit curtailed as a result of the inclusion of borrower-based constraints, which could provide opportunities for alternative lenders to compete with traditional financiers. As the Consultation develops it will be interesting to see if this will impact direct lenders' offering and market share in Italy.