Increased balance sheet flexibility through debt funds

In summary, banks are finding it increasingly difficult to provide enough balance sheet resources to meet the credit demand of their customers. Regulatory capital requirements have significantly increased, while macroeconomic uncertainties have led to greater volatility in financing needs, which are expected to grow considering the required funding for the sustainability and digital transformations. Therefore, banks need to manage their balance sheets more actively:

• Managing capital scarcity: With the implementation of the Basel III package starting in 2025, the introduction of the output floor and other measures will gradually diminish the advantages of internal risk models and lead to a significant increase in risk-weighted assets (RWA). This will result in regulatory capital scarcity that needs to be actively addressed.

• Improving RWA productivity: To ensure efficient use of scarce resources, management objectives should prioritize improving RWA productivity, which is the ratio of earnings to RWA. The low return on equity seen in many European banks, which barely covers cost of capital, underscores the need to improve RWA productivity, regardless of regulatory capital scarcity.

• Managing risk concentrations: Given the macroeconomic uncertainties, it is important to actively manage risk concentrations.

Against this background, the importance of instruments for increasing balance sheet flexibility is growing. Through innovative strategies, balance sheet growth can effectively be decoupled from business growth. Originator banks have the option to use a range of instruments that vary in terms of their impact on balance sheet turnover, RWA relief potential, and long-term earnings contribution.

Since the late 2010s, European banks are increasingly turning to debt funds, in addition to common instruments as syndications and securitizations, to access institutional investors' long-term risk capacity for financing borrowers. The Luxembourg SICAV-Raif has proven to be an attractive debt fund vehicle.

Based on current market observations, several key success factors for ensuring the long-term impact of a debt fund platform can be identified:

• Senior management buy-in: These future-oriented projects will only succeed if the need for continuous development of a strategic distribution platform is acknowledged.

• Early investor communication: Ensuring a steady balance between supply and demand is essential. This involves continuously assessing investors' preferences and risk tolerance to align them with the debt fund strategy.

• Deal parameters specification: Banks, especially as initiators, need to actively approach potential investors with a concrete deal pipeline. The early earmarking of assets is essential.

For banks, the implementation process typically involves following the standard product approval procedures and making any required modifications to credit processes and infrastructure. It is also important to continuously monitor the progress of the platform structuration. Especially when there are delays between the initial agreement and final commitment from a first investor, which can be caused by market volatility. The launch of the first fund is ultimately the key milestone in the process, as it can have a positive reputational impact on internal stakeholders' and can attract other potential investors.

The newly established debt platform of Helaba sets a best practice standard for the German and European banking sector. Helaba is looking to reach a target volume of EUR 200-500 million per fund in the coming years. It is likely that other banks will follow suit and adopt similar innovative solutions for increasing balance sheet flexibility in the near future.

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