Our new study calculates the amount needed by banks in the period to 2019 to comply with the new capital and leverage requirements. The aggregate amount comes out at approximately EUR 26.7 billion and primarily concerns a further strengthening of capital to comply with Basel III requirements. Beyond that, banks must contribute to a deposit guarantee and resolution fund and comply with a leverage ratio that is raised to 4%.
Whether banks will be able to raise additional capital of EUR 26.7 billion partly depends on their future profitability and their access to capital market funding. Given that these factors are uncertain and hard to predict over a five-year horizon, we have developed scenarios. We have used these scenarios to explore how banks can meet their capital needs and how corporate and retail lending is affected.
In a base scenario, where the economy develops as recently projected by DNB and banks do not experience impediments to their capital market access, banks will be able to meet both capital requirements and corporate and retail borrowing needs. In two alternative scenarios where banking capital is harder to raise, credit supply will lag behind credit demand, thereby dampening economic growth.
Another scenario may be one where the economy develops more favourably than projected. In this scenario, strong business investment growth will result in greater demand for credit, with credit demand outpacing credit supply, unless banks are ready and able to raise additional capital.
Even if there is room for credit growth, like in the base scenario, banks may decide to limit credit supply to further strengthen their capital position or to reinforce it at a faster pace. Banks may also wish to limit their lending for reasons unrelated to their capital position, for example to reduce their concentration risk associated with certain activities. As regards the period after the financial crisis, there are strong indications that such supply effects have curtailed lending, in combination with a strong reduction in new borrowing needs. Large companies have been relatively unaffected, given that they usually have considerable financial buffers allowing them to finance their investment plans internally. That is different for small and medium-sized enterprises, whose dependence on bank loans is much greater.
Banks, however, reject a relatively large part of SME loan applications. In particular smaller companies whose solvency and profitability have been eroded by the crisis are finding it difficult to take out loans. In part, this is due to their dependence on domestic demand, whose recovery is slow compared with export demand. In addition, the deteriorated real estate market has caused a decline in the value of assets that could be used as collateral. For some SMEs, it is not so much the capital buffer of their bank but their own financial buffer in the form of equity that limits their ability to borrow.