Global banks' profits and lending will be hurt by Basel III capital rules as lower borrowing costs push companies away from loans to the bond market, the London-based Loan Market Association said.
Return on equity will probably drop to between 12 percent and 15 percent from 20 percent before the global credit crisis, Nick Voisey, a director at the association, said in an interview in Dubai. Lenders will be required to hold more capital to back loans, with $13 million needed for every $100 million of credit extended, up from $8 million, he said. Banks in most developed countries will phase in the rules in the next few years.
"Not only is 13 percent higher than the 8 percent, it will also be more expensive to raise because it will have to be higher-quality capital," Voisey said. "Systemically important banks will need to hold even more."
Regulations from the Basel Committee on Banking Supervision are designed to help prevent a repeat of the bank rescues that followed the 2008 collapse of Lehman Brothers Holdings Inc. While Basel rules don't specifically target lending, loan volumes may be affected by new leverage-ratio standards requiring banks to hold cash or high-quality assets to support revolving credit facilities, Voisey said.
Syndicated lending, which declined across the world as bond sales surged in the past two years, will "definitely pick up" once there's a revival in mergers and acquisitions, he said. Global bond sales advanced 7.6 percent in 2012, while loan volumes dropped 14 percent in the U.S. and 34 percent in Europe, Middle East and Africa, according to data compiled by Bloomberg.
"One of the main uses of the syndicated loan is acquisition financing, and there is very little of that going on at present because of the general lack of confidence in the global economy," Voisey said.