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Bank funding and banking relationships may soon be put even further at risk…

Bank funding could upset your relationship with your bank

Whether or not as a business you’ve previously enjoyed a rewarding relationship with your bank, things have changed as a result of a set of international banking regulations known as Basel III.

Basel III is a series of reform measures, developed by the Basel Committee on Banking Supervision, which are designed to strengthen the regulation, supervision and risk management of the banking system. They have been devised in response to the financial crisis and aim to strengthen the banks ability to respond to economic stress and regulate their risk management procedures.

What does all this mean for the SME?

One definite consequence is that the days of an endless credit supply are even further away than ever.
Basel III sealed a deal in September 2010 to triple the size of the capital reserves that banks are required to hold against losses. It sets out a new key capital ratio of 4.5% – more than double the 2% level in 2010 – plus a new buffer of a further 2.5%. Banks whose capital fall below the buffer zone will face restrictions on paying dividends and bonuses, so the rule sets an effective floor of 7%.

The new rules will be phased in from January 2013 to January 2019. These tougher capital standards are considered critical for preventing another financial crisis but this has curtailed lending, economic growth and is costing jobs.

For the banks, these rules will mean reshuffling their client bases and change products to reduce the amount of risk they take on. Less risk means fewer loans and higher costs associated with those loans.

For business owners, it will lead to transformed banking relationships and different types of funding.

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