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Generally, banks will experience increased pressure on their return on equity due to increased capital and liquidity costs, which, along with increased risk weighted assets will put pressure on margins across all segments.
To become compliant and restore profitability, banks can take a number of measures.
Operational responses. Basel III creates incentives for banks to improve their operating processes, not only to comply but also to increase efficiencies and lower costs.
Tactical responses. A focus on more far-reaching tactical responses in pricing, funding and asset restructuring may be extremely helpful in relieving pressure on profitability.
Strategic responses. Banks have the opportunity to effect major changes from fairly straightforward initiatives, such as retaining earnings to increase tier 1 capital, to more far-reaching possibilities. These possibilities include issuing new capital in light of the new eligibility criteria and phase-in arrangements; changing liquidity risk and funding strategies; and taking a more active approach to managing the balance sheet.
June 7, 2011
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