Bank crisis opens alternative credit lines

Published on Saturday 5 December 2009 13:12

A WAVE of new credit lenders such as hedge funds, ex-investment bankers, asset managers and private equity are set to fill the lending gap as banks repair their balance sheets, an influential new report claims.

But banks returning to safer lending models should be able to triple returns on equity by 2012, according to management consultant Accenture.

Its, as yet unpublished, report says: "New risk takers – outside the classic banking system and unregulated for the moment – will emerge to raise and deploy capital."

Joint author Edwin Van der Ouderaa, who heads Accenture's worldwide research on banking, said: "Each time there is a regulatory push on the banks the more financing activity finds a way outside the regular banking system.

"As the banks shrink their balance sheets and there is a shortage of credit, we believe capital will increasingly find new sources. Ex-investment bankers, hedge funds, asset managers, private equity etc are already inventing innovative products to circumvent the shortage of credit."

Ouderaa said this trend was likely to gain momentum, with more and more companies entering the market as lenders. He said "participating companies" would organise loans that would be structured "somewhere between credit and equity. They will subscribe to preferred shares and bonds, and would get interest and perhaps the first slice of (a new business's] profits".

This likely growth in business lending outside the traditional banking model had obvious regulatory risks, Ouderaa said. "That is why you will need a holistic approach to regulation, not just regulation of the banks," he said.

Accenture, which employs 380 people in Scotland, including 250 in Aberdeen with smaller offices in Edinburgh and Glasgow, interviewed 30 global banking chief executives as part of a study of 150 banks worldwide for its report Rebuilding Bank Profitability to Achieve High Performance. The study began shortly after the collapse of Lehman Brothers in September last year.

The report forecasts that through a widely expected return to safer banking models – with far less reliance on risky trading activities – banks should be able to triple their returns on equity to 15 per cent by 2012, from 4-5 per cent now.

However, the heady days of 20 per cent returns on equity, once hailed as the benchmark, are likely to be unattainable for a long time. The report says "many of the levers that boosted return on equity above 20 per cent are now gone".

It adds there will be "a reduced appetite for trading on the banks' own book, particularly as (regulatory) capital requirements for trading assets are increased".

Ouderaa said trading activities in areas like foreign exchange, bonds and derivatives were still needed to "grease the wheels" of wider banking activity. But Accenture forecasts "a severe reduction" in the proportion of bank income from them. "This went up from about 7 per cent to 25 per cent (at the high point).

"I think trading activities will go down over the coming years to about 5 or 6 per cent," Ouderaa added.