The European Commission announced in July 2011 that they issued the final draft version of the Capital Requirement Directive IV, more commonly known as Basel III, regulating the Credit Institutions and Investment firms. But what is Basel III proposing to make banks stronger and how this will impact bank-owned leasing companies?

The new standard is being introduced following the financial crisis, which revealed both the vulnerabilities in the supervision of the banking system and the lack of resilience of a major part of the financial institutions unable to absorb massive market shocks. Indeed, existing rules did not prevent the crisis from happening as several shortcomings of regulation, scope and implementation across the globe were noticed as well as capital of insufficient quantity and quality, failing liquidity management, inadequate group risk management and governance.

Based on the lessons learnt from the crisis, the regulator developed a series of new standards moving from the Capital as unique prudential reference to a multi-dimensional regulation adding Liquidity and Leverage ratio. It is also important to mention that the regulator introduced a new legal framework of the regulation divided into two legislative instruments: a directive and a regulation. Also called “single rule book” this new legislation is supposed to harmonise prudential rules throughout the European Union and thus ensure an international level playing field.

From a bank-owned leasing company’s perspective, the adaptation of the new standards is not yet clearly defined since we currently stand by a transitional period of observation. On top of that, leasing companies are not naturally regulated and for those who are regulated indeed, it has been noticed that there currently is a patchwork of regulation based on national discretion.

Nevertheless the leasing industry will have to consider these new standards within their business model and anticipate possible impact on their performance, funding capabilities and risk governance. The impact for the end-user fleet operator should be negligible as he will continue to benefit from a wide range of products or services matching his needs.

Regulation’s short-term impact will certainly require additional effort from the industry to meet shareholder’s requirements but long-term economic impact, considering both benefits and costs of the new measures, should strengthen the leasing industry, which is composed of 50% bank-related companies. It is anticipated for 2020-2030 a positive impact of 0.3%-2% in EU GDP backed up by a decrease in probability of systemic banking crises between 29% to 89% (Basel Committee, European Commission services).