For some banks, given the risk sensitive nature of Basel II, the regulatory capital could be substantially reduced by up to 50 percent in segments such as residential mortgages, which would translate in to savings on funding costs.
However, such savings would be subject to conditions: such as requirement that regulatory capital should be higher than economic capital 4 and presence of regulations such as leverage ratios which may prevent banks from reducing their regulatory capital significantly. The McKinsey’s research identifies four important Basel II-related risk-management efficiencies which could together raise pretax earnings by 3 to 6 percent.