Basel III changes the rules of the game for banks and companies

Basel III changes the rules of the game for banks

As a result of the financial crisis, risk requirements for banks have been further tightened. Under "Basel III" financial institutions are now required to meet higher equity ratios and improve their equity structure. Whoever believes that the new rules only impact banks is obviously misinformed. Corporates are already feeling the initial effects of Basel III and further challenges are on the horizon.


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Due to higher capital requirements, interest rates for loans have already risen and those for short-term investments have fallen. In this regard, long-term financing has become more expensive, particularly for corporates with poor ratings. It is conceivable that the banks will change their service range for corporates. New products such as 31 (or more) day investments or bonus programs are being discussed with a view to increasing transaction volume. And, ultimately, banks will take a holistic approach in dealings with customers in order to cross-finance weaker products, but also to single out those customers offering the greatest profit potential.

In view of the changes associated with Basel III, treasurers will most likely have to grapple with the following issues:

  1. Analysis of the bank portfolio
    Today leading companies often collaborate with a few global bank partners. This trend could be reinforced if banks choose to select their customers in a more systematic manner. Above all, companies which currently work with many banks should closely analyze their bank portfolio. The better a corporate understands the financial strategy of its bank, the better placed it will be to efficiently manage its bank costs in the future and to select the right partners. Whereas banks have invested a lot in know-your-customer initiatives over recent years, it's now time for companies to launch know-your-bank projects.
  2. Alternative financing
    Since it is more difficult for companies with poor ratings to obtain loans, treasurers should turn their thoughts towards alternatives such as corporate bonds or private equity fund investments. In general, financial strategies will change, which may make in-house banking and supply chain financing more attractive to corporates.
  3. Alternative investment vehicles
    Declining overnight money interest rates make investment vehicles such as money market funds, which simultaneously mitigate counterparty risk, an attractive option. Treasurers should obtain information from their banks about bonus programs. It might pay off in the future if money were simply left in a current account instead of chasing after (only slightly) higher interest rates. Above all, treasurers should attempt to plan their cash flows with greater precision. This is because the long-term investor can not only select from a wider range of products but also generate higher yields.
  4. Review of credit lines
    As banks are required to hold more equity for credit lines, credit will become more expensive. Thus companies need to consider just how large credit lines need to be and where they can reduce borrowing arrangements; this applies to the overall bank portfolio and individual banks. In addition, techniques such as cash pooling or netting may help to reduce the need for credit limits.
  5. Reduction in working capital
    Under Basel III, companies must pay a higher price, particularly for short-term financing. Accuracy and reliability in the course of liquidity planning will pay off in future, as working capital is thereby reduced and a solid basis for financing can be established.

As is evident, the effects of Basel III on bank relations are already considerable. At the same time, regulation has the potential to fundamentally change the overall market environment through consolidation on the part of banks and companies. It thus critical that each partner understands the other, both today and in the future.

Guest Author: Guenther Peer, Director, Reval Austria GmbH,


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