By Manu Gayatrinath and Katherine Putnam

Since the 2008 financial crisis, the US Federal Reserve and other central banks in Europe have pumped trillions of dollars into the financial markets. Notwithstanding the amounts injected, a liquidity crunch in 2016 is unavoidable and could have a significant impact on available financing for PE sponsors.

Several regulatory factors point to this liquidity crunch, including new financial regulations that demand higher capital and liquidity requirements from banks, which must hold more cash in reserve.liquidity graphic Basel III, for instance, requires banks to maintain certain liquidity coverage ratios such that they have high-quality liquid assets that cover total expected net cash outflows over 30 days. Similarly, the Board of Governors of the Federal Reserve has brought in significantly tougher liquidity requirements for the larger bank holding companies in the US. In addition, increased enforcement of leveraged lending guidelines means that US banks are no longer as active in the syndicated markets as they once were, and are no longer in a position to hold certain riskweighted assets on their balance sheets.