Implementation of Basel III to result in heightened costs for corporates relying on bank funding
Bob Lyddon, managing director of the IBOS Association, observes that the Basel III capital adequacy rules will ultimately raise banks’ business costs, and advises corporates to reassess their bank funding approaches. July 06, 2012 | Bob LyddonInternational corporate organisations will find using banks, particularly with regards to international services, becoming more expensive, and with lesser alternative choices, after the Basel III regulation is enforced. Basel III tightens the screw on banks in three significant ways. Firstly, the regulation will impose the holding of a larger block of capital as a percentage of risk-weighted assets, including all transactions involving credit, market or operational risk, whether they are on-balance sheet or not. The percentage rises from to 10% from an original 4% and banks will want to earn a wider interest margin in order to attain their return on equity (ROE) target. Secondly, it will increase the risk-weighting on all transactions, reversing the endemic and self-certified under-weighting through the 1990s and 2000s, when OECD sovereign risk and exposure secured on real estate (retail and commercial) enjoyed low weightings; since proven to be flawed. On this measure again, banks will need to hold more capital against each loan and so must earn a wider margin in order to have the same return. Thirdly, visible costs on short-term deposits will be imposed, which are deemed "unstable" and for which the bank will have to hold a percentage on a low- or nil-interest bearing account at the central bank. These deposits then form a fund for the central bank to deal with a run on any one bank, and they reflect regulators' unease about institutions that depend on wholesale funding (i.e. that no lessons were learned from Continental Bank of Illinois' demise in 1984). On the asset side of the bank's books, the bank will want more money to pay for the increased capital. On the liability side it will pay less on deposits because the deposits cost the bank more to hold. In other words, the customer will have to pay a higher parking fee for putting its assets and liabilities on the bank's balance sheet, as opposed to finding non-bank investments and non-bank ... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Basel III, Capital & Strategic Issues, Credit Risk, Regulation, Risk and Regulation, Trade Finance, Transaction Bankingbasel III,Capital & Strategic Issues,Credit Risk,riskregulation,Risk and Regulation,Trade Finance,Transaction Banking, Basel III,Capital & Strategic Issues,Credit Risk,Regulation,Risk and Regulation,Trade Finance,Transaction Banking, Keywords:EU, EBA, ROE, OECD, Stress Test, Unicredit, Liquidity, LIBOR, Liquidity, BlackRock, Barclays EU, EBA, ROE, OECD, Stress Test, Unicredit, Liquidity, LIBOR, Liquidity, BlackRock, Barclays
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