Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE credits
The financial sector has traditionally been subject to regulations given the systemic risk it
constitutes. The financial crisis following the seminal collapse of the investment bank
Lehman Brothers in September 2008 revealed that financial institutions constituted more
systemic risk than could be handled by the current regulations. This shed light on the need of
new regulations in order to limit the systemic risk that one sole institution could constitute.
The aim of the thesis is therefore to investigate the impact on return on equity of revolving
credit facilities from the third Basel accord for the Nordic Corporate Bank. In particular, we
aim to answer to following questions:
How is a Nordic corporate bank’s return on equity on individual revolving credit
facilities affected by the third Basel accord?
How will the total portfolio return on equity of the Nordic Corporate Bank be
affected by increased capital requirements and the increased liquidity requirements
for revolving credit facilities?
The study will also amount in a discussion regarding the future development of the lending
market (in the aspect of revolving credit facilities). In the case of changing profitability levels,
the market for revolving credit facilities might change in volume and shape and hence it is of
interest to discuss potential aspects to consider.
The research is conducted using a quantitative method and a deductive approach. A model is
derived for the difference in return on equity. A sensitivity test is conducted by shifting key
variables whilst keeping others constant. The facility utilisation parameter is detrimental to
computing the change in return on equity. For this task, we employ re-sampling techniques
from applied probability theory to produce estimates.
The estimation of the utilisation parameter using applied probability theory results in an
expected value of 7.48% of the size of the facility. Regarding the sensitivity tests, different
parameters affect more or less on the return on equity. A ten percent capital ratio induces a
40% relative decline in return on equity. The eight percent capital ratio induces a 25%
relative decline in return on equity. When shifting the utilisation parameter between five
and ten percent, return on equity is mildly affected. An increase in the price of liquidity to
300 basis points, the new return on equity ranges from -6.39% (BB rated companies) to -
90.16% (A rated companies). For the decrease in the price of liquidity to 10 basis points, the
new return on equity ranges from 14.71% (BB rated companies) to 29.26% (BBB- rated
For the Nordic Corporate Bank’s portfolio, a decline of 9.82% in return on equity is
The results amount in five conclusions:
1. Increased capital requirements are the most affecting factor of return on equity in
the current low interest market when moving from current regulatory conditions to a
fully implemented third Basel accord setting.
2. Better rated companies fare worse than lower rated dittos.
3. Price of liquidity is the parameter that return on equity is most sensitive to in a full
third Basel accord setting, and is the factor that could render revolving credit
4. For the total portfolio return on equity, increased capital requirement is the most
5. The detrimental decline that the liquidity coverage ratio has on revolving credit
facilities might increase the importance of ancillary business.
2013. , 75 p.