Banks Ask UK Clients Not to Borrow

Posted by ProjectC 
naked capitalism
Monday, December 3, 2007

If you had any doubts that the credit contraction was having real-world consequences (beyond, say, the ease of getting a mortgage in the US), consider this DowJones Newswire story (hat tip Michael Panzner). Banks are not only not willing to lend to each other, but because liquidity is scarce, they are trying to dissuade UK clients from borrowing. This is unprecedented.

Now admittedly, standby lines of credit to large corporations are not a profitable product on a risk adjusted basis even in normal times (they are the price of having those relationships). And funding of various supposedly off balance sheet exposures that turned out not to be so off balance sheet is eating up bank credit capacity at precisely the time when their equity bases are shrinking due to writeoffs.

There also appears to be an element of window dressing, of banks trying to avoid having audited year end balance sheets that spook regulators and investors. Not a pretty picture at all.

From DowJones:

"Banks have asked top U.K. corporate clients not to draw on lending facilities to which they are entitled in order to preserve their balance sheets as they approach the financial year end.

The banks are urging some of their biggest clients not to draw on standby credit facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability to fund themselves.

The problems started with the closure of the commercial paper market as a means of cheap funding for companies in the summer. Banks have to provide standby financing of up to 100% to backstop commercial paper programs. With banks struggling for their sources of financing through the interbank market, the drawdowns are having a direct effect on their balance sheets.

Several bankers have said Citigroup (C) is one of those most affected and that the bank was asking some clients not to use standby facilities, which are part of the normal relationship banking arrangements made between banks and companies.

A Citigroup spokesman said: "Citigroup honors its commitments to its clients but, as part of our normal business, we discuss with clients the potential use of our balance sheet. This is standard industry practice."

Simon Allocca, head of non-French corporate origination at BNP Paribas ( 13110.FR), said: "By the end of the summer, the principal problem facing banks was not U.S. sub-prime or collateralized debt obligation exposure but the drawing down of standby loans and bilaterals. In some cases banks are seeking to avoid further balance sheet capital pressure by asking clients not to use their standby facilities."

Standby financing is typically for 364 days and when undrawn has a zero risk weighting. When it is drawn, the risk weighting goes to 100%. This makes the sums involved significant. If a company is unable to tap the markets for commercial paper to the tune of, say, GBP4 billion (EUR5.6 billion), banks may have to provide that amount in standby financing.