Term Paper: Basel III in What Sense

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[. . .] There is going to be a further decline in the ROE in the retail-banking activities of the banks that meet the criteria of being global systemically important financial institutions (G-SIFIs). This decline in ROE is expected to be between 0.4 and 1.2 percentage points (EBA, 2012b).

Although the most important reason of these impacts is Basel III however, there are many other factors as well whose cumulative impact along with Basel III resulted in this decline in the ROE. Mortgages are especially a hard hit in the asset-based products. Debit cards and the investment products were the ones in the liability products that were hit the hardest especially in U.K (EBA, 2012b).

It is highly unlikely that in short to medium term the industry will be able to get to the point that it achieved before the regulatory reform. However, the individual banks might be able to rebuild the ROE to the level that it was at before these regulations took effect. This can be done by the banks by pulling all the four levels that are available to them (EBA, 2012a):

Approximately 30-360 basis points can be built by reducing the funding and capital wastage with the help of technical optimization.

ROE can be improved by 10-80 basis points with the help of capital and funding-light operating models.

Re-pricing in some selective areas might be possible.

The single most important lever is the realignment of substantial business model (EBA, 2012a).

In order to rebuild the ROE step-by-step the banks should make regulatory mitigation road map that could be embedded into a comprehensive strategic review (EBA, 2010).

All in all it can be clearly seen that the parts of Basel III through which the retail banking is affected are the ones that affect the whole banks such as; liquidity requirements and the capital payments. The retail banks will especially be affected by the capital ratios since in the recent years most of these have been operated by capital ratios that were lower as compared to the wholesale banks. Capital quality measures, such as the deduction of silent participations in Germany can affect the retail institutions. Even thought the liquidity requirements were lowered in the July 2010 Annex they will also be a factor (BCBS, 2010).

The new product-specific requirements of Basel III have an effect that is less relevant. After being amended in the July 2010 Annex the new funding requirements don't really pose any specific challenge, the new market-risk framework doesn't apply to the retail segment either (Del Punta, 2011).

An increase of up to 70 basis points will be seen in the short-term retail loans. An increase in the target ratios for the segments with long-term funding needs, relatively high risk weights and higher liquidity is the main reason behind this effect. In some cases the banks might be able to pass this effect onto the customers however; the repricing might be difficult in certain finance segments of the consumers (Del Punta, 2011).

References

BCBS -- Basel Committee on Banking Supervision (2010), Results of the comprehensive quantitative impact study, Basel, December.

Blundell-Wignall, A. (2011), "Solving the Financial and Sovereign Debt Crisis in Europe," OECD Journal: Financial Market Trends, vol. 2011/2.

Blundell-Wignall, A. And P.E. Atkinson (2008), "The Subprime Crisis: Causal Distortions and Regulatory Reform," in: Lessons From the Financial Turmoil of 2007 and 2008,

Blundell-Wignall, A. And P.E. Atkinson, (2010), "Thinking Beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, vol. 2010/1.

Blundell-Wignall, A. And P.E. Atkinson, (2011), Global SIFIs, Derivatives and Financial Stability, OECD Journal, Financial Market Trends, vol. 2011/1.

Del Punta, S. (2011), Liquidity, Risk Management of Banks, presentation to the Banca IMI conference The Debt Crisis: Different Rules for a Different World, New York, 20 May 2011.

EBA -- European Banking Authority (2010), Results of the comprehensive quantitative impact study, London, December.

EBA -- European Banking Authority (2012a) Overview of the Capital Plans following the EBA Recommendation on the creation and supervisory oversight of temporary capital buffers to restore market confidence (EBA December 2011 Recommendation), Document EBA 2012 005, 9 February.

EBA -- European Banking Authority (2012b), Results of the Basel III monitoring exercise as of 30 June 2011,… [END OF PREVIEW]

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