European commercial loans to ship owners could be further reduced by a new regulatory audit, according to bankers speaking at the annual Marine Money Week conference in New York.
Most European shipping banks use their own internal models under the Basel II regulatory regime to rate the risk of shipping loans and to determine the amount of capital they keep in reserve against them. These internal rating models were approved by individual counties’ regulators but must now be approved by the European Central Bank (ECB), which is currently in the midst of auditing specialised lending, including ship finance.
“There are different amounts of regulatory capital being held by different banks for similar loans,” said Nordea shipping head Hans Kjelsrud. “The ECB wants to level the playing field and there might be a minimum amount of capital that will need to be held [against shipping loans]. This is important because European banks still provide 70-75% of all bank debt to the shipping industry.”
In 2014, significant media attention was focused on the Asset Quality Review (AQR) ‘stress test’ of EU banks conducted by the European Banking Authority. “The AQR was a bit of an anti-climax,” said Credit Agricole managing director Aodhan McCarthy. “I think what is happening now with the audit [of EU banking procedures] is probably the ‘real AQR’.”
According to ABN AMRO transportation head Gust Biesbroeck, the ECB review of bank processes that is now underway is “at least as painful as the AQR itself”. He believes the outcome of the review will be that “the rating models we use will become a little bit less sophisticated and a little more conservative. The sophistication we put in over the past few years is basically being taken out by the ECB. ‘Simplicity’ is the key word.”
Citigroup managing director Shreyas Chipalkatty warned that “shipping finance has been a marginal activity for most banks” and rising regulation pressure “will force most banks to decide whether to stay or go”. The outcome of these decisions “will impact how much capital is available for this industry”, he said.
Another consequence of ECB regulation, according to bankers speaking at Marine Money Week, is that the European shipping lenders will compete with each other less on loan pricing and more on a broader portfolio of value-added services. As a result, banks will favour shipping clients with lower loan margins if clients also purchase value-added services.