The Federal Reserve approved new rules last week to implement global Basel III capital-adequacy standards and applied those requirements to virtually all U.S. financial institutions. The move may make providing services to middle-market corporate clients prohibitively expensive for banks.
Other U.S. banking regulators are expected to follow the Fed’s lead and approve similar rules soon. Ultimately, brokers and other nonbank entities are expected to be subject to similar standards.
Smaller banks did get a break in April when regulators raised the proposed threshold to be considered a swap dealer under the Dodd-Frank Act to $8 billion notional value of swaps generated annually, from $100 million. Now, banks under the threshold will escape many burdensome regulations, but they’ll receive no breaks on capital requirements.
“If you’re weaker credit that’s used to getting swaps from a regional bank, the bank may conclude that even though it won’t be tagged as a swap dealer and face those regulations, the new capital requirements make the swap business no longer attractive,” Deas says. “So that could have a dramatic impact for the middle-market corporate world in terms of hedging.”