Using Risk-Weighted Assets to Generate Risk-Weighted Fees to Counter the Effects of Basel III on Revenue Generation

Abstract

Basel III, a regulatory reform, aimed at strengthening the financial resilience of banks and the commensurate stability of the financial sector, has the potential to slow down revenue generation capacity of the same banks that it intends to strengthen and stabilize. We demonstrate the viability of using the risk-weights as espoused in risk-weighted assets (RWA) to generate non-interest revenue through fees based on deliberate cancellation of insurance on physical assets held by borrowers during the tenure of the loan. Instead of employing the risk-weights to determine the quantities of capital required, we deploy them in an effort to generate proportionate fees that can serve to alleviate banks from the downward pressure on net income emanating from the application of Basel III regulatory pillars-Capital adequacy, liquidity requirement and the leverage ceiling. We document and illuminate the requirements and the massive income resulting in categorizing assets in terms of their risk weights in order to determine fees associated with monthly cancellations or lapse of insurance contracts that are meant to provide mitigation measures for the protection of those assets