JT: What do you think the biggest changes for banks from the implementation of Basel IV will be? And how will lending to corporates be affected? Impact on availability or pricing?
JBJ & AL: The finalisation of Basel III, which you call Basel IV, will fundamentally change how capital costs are allocated. While the average impact has been significantly reduced in the Commission's recent proposal, there are still large differences within different lending portfolios.
For banks bound by the output floor, corporate exposures will see a significant rise in capital requirements – for example, for some banks they could double. In contrast, we expect a smaller impact on retail mortgage lending, as it has received more favourable capital requirements in the Commission's proposal.
Furthermore, in several countries, we expect only part of the IRB-using banks' lending to be bound by the output floor. This means that some banks will not really see a strong increase in capital requirements, while other banks – operating in the same market – will see a massive increase. This will likely impact the competitive dynamics for different customer segments, with some banks becoming more competitive in terms of pricing, e.g. within corporate exposures. As a result, banks experiencing a large increase in capital costs might be reluctant to pass on the higher capital costs to the specific customer segment – but that would still beg the question as to how they should pay the bill.
Of course, there is quite a lot going on at the moment: Ukraine, inflation, the weaning off from QE, to name a few major macroeconomic influences. It is difficult to fully disentangle all the different individual effects.