The new Basel 3 banking rules are likely to increase funding costs for banks by as much as 30%, says leading rating agency.

basel-3-scadsoftware-johannesburg-gautengThe implementation of Basel III in the global banking sector will require greater management of risk and capital, according to a report by US-based consulting group Bain and this is a poser for local banks.

Paul Greeff of Global Credit Ratings (GCR) explained that under current plans, liquidity requirements for banks would be tightened through the introduction of two minimum standards (ratios) for funding liquidity.

“The Liquidity Coverage Ratio (LCR), which is designed to ensure that a bank can withstand an acute stress scenario for one month, requires that the stock of high quality, liquid assets exceeds net outflows over a period of 30 days and will come into effect from January 1 2015,” Greeff said.

According to Greeff the biggest impact from the LCR will be increased pressure on profitability and return on equity.

“Banks may have to increase their liquid asset holdings, which will in turn reduce asset yields, while the additional resources required to track these ratios will impact operating costs. A potential knock-on effect may be increased customer pricing, whilst a redesign of business models and portfolio focus may also be required,” he said.

Basel III and other regulatory changes are expected to impact on banks’ profitability.

A PricewaterhouseCoopers survey conducted in 2011 revealed that CEOs of South African banks identified Basel III as the most important of the many regulatory changes that would impact banking business models going forward.

Local banks have to be Basel 3 compliant by 2015 and the South African Reserve Bank said it will not lengthen the time lenders in the country will have to comply with the new global banking rules.

Commenting further on the impact on local Banks Greeff said: “Furthermore, growth in unsecured lending has already accelerated, which, whilst being high yielding, increases the potential for bad debts going forward. There is also a lack of supply of high quality liquid assets, partly due to the size of the South African market and the ratings of issuers.”

Greeff explained that the Bain report was correct in highlighting that the management of risk and capital must be at the heart of banks’ strategies in the future.

“South African banks will need to proactively and more effectively manage liquidity and minimise costs if they are to mitigate the impact of such reform.”

So, what is new for the dear overburdened tax payers and banking customers in South Africa – will this again impact in the form of higher bank charges?

View the original article by Samuel Mungadze here: