IFR New Styles for DCM Roundtable 2013
IFR hosted a fascinating roundtable recently at which a dozen senior and highly experienced DCM professionals discussed in an open forum the future directions for this key financing class under the title of “Plotting a strategic future for debt capital markets: factoring supply-side and demand drivers into the new structural paradigm”.
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The backdrop to the discussion is by now well-known: banks are facing a far more stringent and robust capital and regulatory regime across the world where the quantum of capital required, the cost and structure of capital bases and the incidence of liquidity and leverage caps are forcing a fundamental re-appraisal across any number of dimensions.
Strategic direction, optimal sizing of bank balance sheets, approach to balance sheet and risk-weighted asset management, client engagement modalities and client-service models are all under scrutiny by individual management teams as well as domestic, regional and global supervisory and regulatory agencies, not to mention politicians. The banking industry has become a complicated place in which to do business.
Macro factors are only making the tasks more convoluted. Add to the factors listed above the far from complete cycle of bank deleveraging – in fact by some measures deleveraging is going backwards – ongoing liquidity injections by central banks, uncertainty about how long quantitative easing will be with us and what the exit strategy is and what you’re left holding is something of a conundrum if the task at hand is to extrapolate the impacts at an individual product level.
But that was exactly the task IFR put to the IFR DCM Roundtable 12, which has a combined length of service of close to 250 years! And that’s not just playing with numbers. Those in particular at the top end of the 15 to 30 years of service spread have witnessed and navigated any number of market cycles. As we move forward with this complex set of circumstances, experience will count.
At the sharp end of the altered status quo lie some basic realities: banks have reduced lending capacity, and there is a negative funding gap for banks vis-a-vis their top end corporate clients. Disintermediation here is a slam-dunk.
Beyond that, can DCM fulfil SME funding needs? If you assume that top end mid-market corporates have already been enfranchised into the DCM borrower base, the battleground is the mid-tier of the mid-market segment. Hundreds of corporates in this space have tapped the bond market in the past couple of years where until recently their only avenue would have been the banks. A functioning SME securitisation market would move the needle dramatically in this area. This, however, is a work in progress.
As for specialised bank risk, there is evidence that some institutional investors are putting together teams to evaluate things like infrastructure and real estate. But whether this kind of risk can morph fully into the bond market is an open question. The bond market certainly won’t come close to filling the space vacated by the banks in the short term. Beyond that, the growth of institutional and retail lending pools, the expansion of shadow banks into straight financing, and the growth of a European private placement market are all in play.
Asked whether we are heading towards a new paradigm in DCM, some of the IFR DCM Roundtable 12 think we’re already there.