2013-02-26 – London
Smaller banks using up to date credit modelling software can compete with larger banks
Largely in response to the credit crisis, banks need to adhere to strict reform measures set in place by the Basel Committee on Banking Supervision. Basel III provides a global regulatory standard on proper capital levels, leverage ratios and liquidity. For risk management purposes, particular emphasis has been placed on banks’ capital requirements – designed to protect not just the bank, but the customer too.
The Basel III measures must be written into national law and for members of the European Union this means reaching a Union-wide agreement. The EU failed to reach an agreement on Basel rules on February 20 after disagreeing at talks in Brussels on bonuses, capital requirements for big lenders and powers available to the European Banking Authority. Members of the European Parliament and diplomats agreed to reconvene today after their negotiations ended without a deal on how to implement components of the Basel bank regulations in the EU.
European Union member states need to reach an agreement next month or it will run out of time to meet the January 2014 target date to implement the Basel III accord. Missing the March 2013 deadline could potentially force the EU to shorten the transition period, putting strain on lenders to adjust by the start of next year.
On a national level, small UK banks have seen a marked difference in treatment under the new rules when compared with the bigger banks. Proportionately, capital requirements are significantly larger for small banks, which are in turn undermining healthy competition and growth. Moreover, there is a smaller market of lending providers offering little choice for individuals and businesses seeking loans.
A key competitive advantage for bigger banks is down to their use of large loan databases to create internal models which measure the risks involved with individual loans. Under the new rules, risk models of this type alleviate some of the tight regulatory constraints surrounding capital requirements. Bigger banks are rewarded with lower capital requirements and more freedom to expand their lending capacity.
Mid-market consultancies such as Modelling Design Partners are entering the market with software such as SolveXia to assist small and medium-sized banks in developing their credit models and databases. These models can be produced to utilise the vast array of loan data to more effectively calculate credit risk. This could bring the capital requirements of small and medium banks more in line with those of larger banks. This may in turn improve the availability of loans to small and medium-sized businesses.
