Basel III and Profitability

The new Basel III rules on capital and liquidity are focusing banks on how to achieve compliance with new ratios. But as McKinsey points out in a recent white paper, banks also need to start developing strategies and initiatives to enable them to make market-acceptable returns from their products and services under the Basel III rules.  McKinsey estimates that the new rules will add 70 basis points to the cost of providing consumer finance.

Two ways of recouping this cost increase are through price increases and more efficient use of capital.  So price optimization strategies and capital allocation optimization would seem the logical way to go. I discuss the topic of capital management in a recent paper Leaning Into the Next Economy: The Counter-Cyclical Imperative. This is proving a hot topic in presentations FICO is giving at conferences, and no wonder: FICO’s recent European Credit Risk Managers survey with Efma showed that lenders believe Basel and other regulations will cut sharply into profitability.