Basel III favors low-risk retail banking
The guest argued that the Basel III Endgame proposal is a net positive for traditional banks engaged in low-risk, prime residential mortgage and retail lending due to significantly lower risk weightings.
The argument
Under the proposed rules, banks engaging in prudent lending (such as low loan-to-value mortgages with 20% down payments) will see risk weights cut by half or more, freeing up trapped capital to be deployed back into the real economy.
The thesis, stress-tested
✓ What validates it
- ✓Implementation of the proposed risk-weight reductions in the final Basel III rule
- ✓Reported increases in bank capital return programs (buybacks/dividends) as capital is freed up
▸ Risks discussed
- ▸Specialized, subordinated, or equity-like lending will face higher relative capital costs
- ▸Potential for less granular risk sensitivity compared to pure internal models
Hear it yourself
"So we addressed most of them, and twenty seventeen was sort of maybe the last 25 to 30% of it, where they really dug into the risk weights and and tried to make sure that they were comparable and risk sensitive and and all that. So what remains? So after after this, it's sort of like, potentially further refinements. But after The US gets done with this and Europe and and Japan and all these other jurisdictions, then I think we're done for now. Then maybe we turn our attention to, you know, liquidity and stress testing and things like that. But the idea is the dream is that once we get all this done and we've fully implemented December 2017, then everything is done."
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