Writing in the Financial Times, a banker claimed that Basel II paid little attention to banks’ own liquidity and that a rigid application could mean that banks operated with less capital when they needed it most.
This followed a report which stated that banks had been instructed to hold more capital in order to ensure that there were no further Northern Rock-style problems.
However, the mortgage industry has reacted to the claims.
A Mortgage Introducer source claimed that as a result of the credit crunch, the market was positioning itself towards good quality business as seen by the recent changes to lenders’ criteria, and pricing and risk policies.
The source, who asked to remain anonymous, said: “Basel II risk models allow the lender to calculate an individual’s propensity to default and to individually risk-grade customers.
"This means that for a low risk customer, a lower amount of capital is reserved against the loan, so more business can be written. As a result of this, the lender can either reduce interest rates to improve competitiveness and grow market share or maintain interest rates resulting in a higher return on capital.
“As less capital is required for higher quality business, the lender can afford to improve its competitive position by offering targeted individuals a better product interest rate, while charging a higher interest rate for riskier customers.
"With the credit crunch likely to continue throughout 2008, it’s clear that Basel II lenders will have an advantage in targeting the business they want and being able to accurately price for the business.”
Bill Warren, director of associate members at the Regulatory Association of Mortgage Packagers (RAMP), commented on the importance of Basel II to the current market.
He said: “I’m quite in favour of Basel II. Even before the credit crunch, you can measure lenders in a different way and this is now more important than ever.”
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