Basel III, and related reforms adopted by global regulators after the recent financial markets crisis, have significant ramifications for financial institutions, particularly as they relate to how financial institutions fund their operations.
For providers of wholesale funding to financial institutions, like Hudson Castle, one of the most important developments under Basel III has been the shifting by financial institutions away from their reliance on short-term funding sources toward longer term, more permanent funding sources. At Hudson Castle, we began to observe this market shift with our clients in the latter part of 2009, as credit markets noticeably improved. This shift in the bank funding model accelerated in 2010 and 2011 and now appears to be a core liability management philosophy with our clients.
As a consequence, the robustness of our business model, which was predicated on filling the burgeoning demand by banks for short-term funding, has declined sharply and can no longer provide the risk adjusted returns expected by our stakeholders. In response to this, in June 2011 Hudson Castle agreed to sell certain key strategic business assets to a market participant and is no longer arranging short-term funding for banks.