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The Impact of the Third Basel Accord onRevolving Credit Facilities
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Industrial Management.
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Industrial Management.
2013 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

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?

1

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

companies).

For the Nordic Corporate Bank’s portfolio, a decline of 9.82% in return on equity is

computed.

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.

1

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

facilities unprofitable.

4. For the total portfolio return on equity, increased capital requirement is the most

detrimental factor.

5. The detrimental decline that the liquidity coverage ratio has on revolving credit

facilities might increase the importance of ancillary business.

Place, publisher, year, edition, pages
2013. , 75 p.
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-142641OAI: oai:DiVA.org:kth-142641DiVA: diva2:703958
Supervisors
Examiners
Available from: 2014-04-17 Created: 2014-03-10 Last updated: 2014-04-17Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
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