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22 September 2023

Leveraging the 2023 Basel III Phase-in Period to Optimize Bank Profitability

Authors: Paul Coni, Moody’s Analytics and Hugo van Wijk, Vallstein

In the dynamic landscape of international banking, the Basel III regulations have forced banks to search for innovative ways to improve profitability without compromising competitiveness or shareholder returns. This article explores two potential strategies that leverage the power of data analytics to optimize revenue growth and operational efficiency.

To enhance banks’ resilience against financial shocks, Basel III required that banks hold more high-quality capital to cover potential losses. This requirement placed pressure on banks’ profitability since higher capital requirements meant less capital available for lending or investment.

In December 2017, the BCBS issued final reforms – called by some Basel IV or Basel 3.1 – which included a range of revisions and additions to the existing standard. One of the changes introduced was the “aggregate output floor,” which placed a restriction on banks’ use of internal models in favor of revised standardized approaches to the calculation of risk-weighted assets (RWAs) and capital ratios. Specifically, modelled capital charges would have to be at least 72.5% (the floor) of the aggregate RWAs calculated using the standardized approach. As a result of the COVID-19 pandemic, the implementation date for this reform was delayed to January 2023, and it is subject to a 5-year phase-in period after that.

Given the potential for higher capital charges due to the “floor”, banks need to look for alternative avenues for improving profitability while managing competitiveness and shareholder returns. Two potential strategies are discussed in this article.

1) Identifying Growth Opportunities and Optimizing Resource Allocation

One avenue to revenue growth is identifying opportunities among existing clients.

Analyzing a corporate or commercial client’s annual spend on their banking products and the associated regulatory capital, a bank can determine their clients’ spending capacity (i.e. potential revenue or “client wallet”) as well as their captured share of that revenue to determine whether they have an appropriate revenue share or “share of wallet.”

If a bank’s share of wallet is small, then by cross-selling additional products to the customer, it can increase revenues without raising prices on existing products. The additional fee revenue generated from cross-selling can offset the reduced return resulting from the output floor’s increased capital requirements.

By analyzing existing client portfolios, banks can identify growth opportunities and prioritize relationships that align with their strategic objectives. Performing this analysis also helps identify growth opportunities not previously identified with clients or client relationships not generating adequate growth, requiring a managed exit, thus freeing up capital resources and helping to reduce costs.

2) Reducing Operational Costs

Another avenue for improving bank performance is by reducing operational costs.

Simplifying pricing, particularly in transaction banking, can yield significant cost savings. In many cases, the number of individual billing items in payment services can be extensive, while the revenue generated from this product line may represent only a fraction of total revenues. By simplifying pricing structures and reducing the number of billing items, banks can streamline operations and reduce costs.

Additionally, streamlining pricing agreements for specific product and client groups can alleviate the burden on the back-office. Ensuring accurate implementation of negotiated pricing and eliminating discrepancies further reduces operational costs and risks.

Both strategies discussed above require robust data on the spending capacity of corporate clients and prospects on banking products and services. WalletSizing® in Orbis contains estimated “wallets” for over 60 million companies globally and can help make better informed decisions, in less time, while optimizing the allocation of both human and capital resources. To learn more visit


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