Basel IV regulations have aviation lenders reconsidering how they will participate in the market in future.
Financiers are assessing their capacity to lend given the proposed changes to standardise risk-weighted asset calculations, requiring banks to retain significantly more equity against secured transactions.
"Aviation is being unfairly treated by this regulation," says Eelco van de Stadt, managing director at DVB Transport. "It [Basel IV] is going to have some impact."
Current Basel IV proposals are aimed at restructuring the risk-weighted asset framework, and would require banks to adopt a standardised approach or supervisory slotting approach for aircraft lending.
"If this surge of liquidity somehow comes to halt, and we're faced with the conventional players pulling out – and add to that the lack of guarantees from the ECAs – that could have a severe impact," warns van de Stadt. "With nine years of backlog with OEMs, there's huge pressure of maintaining this liquidity."
He is not the first banker to go public with concerns about the new regulation. Speaking at a conference in September, Credit Agricole CIB's head of asset finance Jose Abramovici said that his bank – which retained nearly $2 billion on its books last year – would have significantly less capacity if the rules prevailed as they were currently proposed.
Van de Stadt says the new proposals could mean that DVB turns to being an arranger rather than a liquidity provider. He doubts, however, that the rules will be finalised in their current form.
DVB has tended to take on risk where other lenders will not, working with clients further down the credit spectrum or with assets that are less liquid. The loss of lenders like DVB could impact the market significantly.
In a March letter to the Basel Committee on Banking Supervision, the Aviation Working Group wrote that aircraft-backed loans had some of the lowest LGDs (losses given default). "The flat risk weight of 120% is vastly out of proportion with transactional risk and LGD data and estimates determined by the most conservative methods," it argued.
While the new framework is set to come into force in early 2018, deals up to 2020 are likely to be grandfathered.
Source: Cirium Dashboard