Essay Basel IIi Requirements And Repo Availability
On January 1, 2014, Basel III regulations go into effect for banks with more than $250B in total consolidated assets or greater than $10B in foreign exposure. These large banks are significant issuers of repurchase agreements, the primary investment vehicle for excess funds in venture capital firms. Generally, collateral used in these transactions are securities issued or guaranteed by the US government or a Federal Agency, and the agreements reset each day. The new Basel III capital requirements potentially make posting these securities as collateral – and therefore facilitating repo transactions – more difficult, as banks will tend to hold for their own account these governments guaranteed securities due to the low risk weighting (and consequently lower capital requirements) they carry under Basel III.
Additionally, the supply of this high quality collateral has diminished because of the Federal Reserve’s asset purchase plan. On balance, the availability of repo collateralized by high-quality, low risk securities may decline over the near term, resulting in a shift towards lower-quality, higher risk collateral for longer terms. We might see the development of alternative interest bearing investment products as a result of this potential shortfall in repo inventory. The options currently are limited given UBTI is a concern for many venture capital firms. (“New Regulatory Considerations for Venture Firms”, Sep. 5, 2013)