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Brokers to foot bill for Basel 4 transition

by 4 minute read

Mortgage brokers may face additional costs when the major banks move to comply with new capital requirements proposed by global regulatory standard Basel 4.

According to a new report released by investment bank JP Morgan, changes in the minimum capital expected to be held by major lenders may have a flow-on impact on the bottom lines of intermediary distribution professionals.

The report warns that, under the Basel 4 proposals, debt service coverage (DSC) levels are likely to be calculated on a “dynamic basis”, which would be logistically difficult for brokers to implement without access to the borrower’s primary transaction account.

“In this scenario, brokers may be dependent on receiving information from the borrower's primary banking relationship partner, which may in turn come at a cost,” the report explains.


On the plus side, however, the report also anticipates a transition to Basel 4 proposals could result in a surge in refinancing activity or “churn”, giving brokers access to incrementally better pricing.

“In this instance, brokers may be a key beneficiary of increased churn in the market, however they may need to work closely with the bank that may be at a competitive advantage to capture flow,” the report states.

The report also warns the major banks from adopting “lazy” approaches to mortgage portfolio repricing as part of the transition to Basel 4.

“Much of the debate around offsets to higher capital requirements for the major banks has centred around repricing of the mortgage portfolio, with the ‘back of envelope’ sensitivities suggesting a 30bp repricing of the mortgage book to attain a ROE neutral scenario,” the report states.

“We do not think this would be the right approach for major banks to take from a competitive stand point.”

[Related: Banks to pay $6m each to fund regulator]

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