Basel II to boost both large and small banks' loan prices

Bankers at small regional or sub-regional banks fear that Basel II will give their larger rivals, which will use the advanced internal ratings-based (IRB) approach to calculate regulatory capital, a pricing advantage. But speakers on today’s opening panel on Basel II’s different ramifications for large and small banks said the big institutions will not be able to undercut small banks on prices due to a regulatory capital advantage.

The products that will see a rise are those that banks currently under-price from a risk capital perspective. Rudi De Koker, director of risk and capital analysis at Citigroup International, said the capital costs of these products will rise for small and large banks alike, and for those that use the standardised approach for calculating regulatory capital as well as to those using the more sophisticated IRB approaches. “It will influence pricing in certain products and markets, but will affect both large banks and small banks,” he said.

Marc Saidenberg, assistant vice-president in the bank supervision group at the Federal Reserve Bank of New York, added: “Risk sensitivity is a double-edged sword. Some retail capital requirements will go down but some will go up.” The concept of across-the-board capital savings, Saidenberg added, “is in some cases not being borne out.”

The panel also discussed the Basel Committee’s change of heart about multinational banks’ desire to implement Basel II in stages. “The Committee originally said implement all-or-nothing,” Saidenberg said. “They were worried about cherry-picking.” That is, regulators thought banks would implement an advanced IRB method where it gave them a capital advantage but keep their old approach in other areas where it was more advantageous. “But now the Committee has backed off.” It recognised that firms with operations in different regions may have difficulty applying the same approach consistently throughout a global institution, he noted. “Data and business models may not support a full implementation,” De Koker added.

However, Saidenberg noted that regulators will scrutinise partial implementation plans carefully. “There has to be a credible roll-out plan,” he said.