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Regulators and lenders may copy US lending markets' diversity of credit channels

NEW YORK: Regulators and lenders may emulate the US lending markets' diversity of funding channels which emphasises less reliance on banks as sources of credit, said global real estate consultancy DTZ.

This change in direction could arise from issues related to debt and equity, it said in its Global Debt Funding Gap on Nov 24.

For instance, banks may be expected to take more responsibility in addressing their most problematic loan positions as governments pay more attention to their sovereign deficits and debts.

Basel III requirements will also necessitate stricter capital requirements although the reserve requirements do not take effect until the end of the decade.

"Further regulatory reforms, including Solvency II, new rating rules, the EU Alternative Investment Fund managers Directive, the Dodd-Frank reform and Consumer Protection Act present further challenges in the years to come," it said.

DTZ added that as interest rates are at record lows, any increase will worsen the situation of the more struggling borrowers and force them to find a solution.

"Longer loan maturities, scheduled amortisation and fixed (unhedged) rates provide the US with significant advantages," it said.

"In contrast, around three quarters of the European markets is dominated by banks with the remaining quarter split between covered bonds and CMBS. In Asia Pacific lending is dominated by banks."

DTZ noted that banks had progressed from "pure extend and pretend" to "extend and amend", where terms such as margins and cash trapping are amended.

"Banks are getting tougher on borrowers, but due to swap breakage costs foreclosure is not always feasible," it said.

This statement comes on the back of the global debt funding gaps, which continues to plague several international real estate markets.

The debt funding gap is the difference between the current debt balance as it matures over time and the available debt to replace it.

DTZ had projected a global debt funding gap of US$245 billion (RM774.2 billion) from 2011 to 2013, with Europe having the greatest exposure at 51% (US$126 billion), then Asia Pacific at 29% (US$70 billion) and finally the US at 20% (US$49 billion).

"Notably, our research does not highlight any debt funding gap in emerging markets such as China or India which have seen a development boom in recent years. This boom has been partly supported by debt.

"In fact, China has the second highest level of outstanding debt in the region after Japan. But, so far these markets have been insulated from any significant downturn as capital values have held up," it said.

The consultancy noted that several European markets including Ireland, Spain and the UK have relatively huge debt funding gaps in comparison with the size of their markets while relative funding gap exposure in the US is not as significant.

Meanwhile, Japan is the only market in the Asia Pacific region with a large debt funding gap.

"The global US$245 billion debt funding gap can be bridged as there is US$376 billion of equity capital available. But, there are regional differences, with Europe trailing (the region has US$145 billion in available equity and a debt funding gap of US$125 billion)," DTZ said.
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