Problems that will arise due to Basel III: Credit handling inside a decentralized bank

This paper belongs to Thematic Session 2 of the Gothenburg Meeting Science Symposium

Gunnar Wahlström, University of Gothenburg (Gothenburg Research Institute)

Abstract 
Recent financial crises has emphasized Enterprise Risk Management (ERM) in banks. ERM is manifested by risk measurement, in mandatory regulation for banks, as in the near future Basel III, to be fully implemented in 2019. Risk measurement is in line with the idea of centralization as data and models are developed at headquarter making use of risk measurement to contradict the idea of decentralization. This article concentrates on the actual use of the regulation inside a decentralized bank by answer the question: What problems might a bank experience in their usage of Basel III? The question is being answered by documents and semi structured interviews in a decentralized managed bank, one amongst the 100 greatest in the world. Regulation, now latest Basel III, favor a credit handling based on risk measurement centralized to a bank’s headquarter were also appropriate actions are initiated. Thus, in case of problem with a credit, signals from credit risk measurement system characterized by numbers (or hard information), is at headquarter, as well as the responsibility for early actions. However for a decentralized bank the individual credit officer at a local branch is responsible for the credit and actions are made down in the organization. In a decentralized bank the credit officer is close to the borrower and uses a different set of information (soft information) than risk measurement (hard information). Soft information are faster than hard information. Plausible, by using soft information signs of problems arrive earlier to bank managers and decisions become improved as different dimensions of the credit are discussed in meetings. This may, at least partly, explain why the decentralized bank has lower credit losses and higher yield than its competitors in the last forty years. Last, it seems that formalized regulation is not improving credit handling in the decentralized bank but may do so in more centralized banks.