Regulatory pressure will continue to be an issue for banks, but BlackRock’s improvement of its securities lending has meant that an increased number of financial institutions now prefer to use the asset manager to offload riskier assets.
The Financial Times explains that securities lending is where asset managers loan out stocks or bonds from their funds in return for collateral. According to industry figures, these improvements mean that it will be cheaper for companies to borrow securities and in turn, BlackRock will become more competitive in this field.
$477 million was made from lending clients’ securities in 2015 and the review of the company will continue as a result of the International Securities Association (Isla) claims that €1.8 trillion of securities were on loan at the end of June and up to €100bn by December 2014, according to the FT.
Chief operating officer of Isla, Andrew Dyson, highlights that while banks are offloading their less-liquid securities as collateral, they are also borrowing high-quality liquid assets, like government bonds and blue-chip stocks. “Banks that naturally have held assets on their balance sheets such as equities and corporate bonds are looking at other options now,” Dyson said.
Dyson continued to explain that as asset managers have to deal with low bond yields, other sources of revenue and returns like securities lending programmes become appealing. “All lenders of securities are probably looking at securities lending revenues more now than in the past,” Dyson was quoted in the FT.
In 2012, rules were introduced in Europe that meant that income that is gained from securities lending should be returned to the fund after direct and indirect costs. However, the big concern with securities lending is that investors could lose money if the collateral is not of good quality when a fund loans out a stock to a company that goes bankrupt.
“Blackrock continues to select only highly creditworthy borrowers based on conservative credit standards defined by our risk team, which operates independently from our securities lending business,” a BlackRock spokesperson said in the FT.