The new Basel capital accord: potential effects on lending rates in New Zealand
Author: Kurt Hess
Abstract: This article focuses on potential effects of the new Basel II Capital Accord on lending rates in New Zealand. Lending rates might be affected by both revised asset risk weightings and alternative methods for determining minimum capital requirements. Media commentators have thus often expressed the concern that loans to certain sectors like SMEs could become prohibitively costly while others, like the residential mortgage sector, could benefit. Based on ideas first formulated by Modigliani and Miller (1958), it is argued the new regime will help move the banking system to a more risk-based loan pricing away from traditional loan cost calculation schemes which erroneously still assume fixed cost of capital charges. This, in turn, will lead to lending rates more in line with the true risk of the underlying credit and mitigate some of the effects of the new regulatory regime, in particular, the modified risk weights.