An image often associated with the provisions of the Basel II agreement is the three pillar model. This model describes the requirements put on commercial banks by the Basel agreement. The three pillars refer to the minimum equity capital requirement, the requirement on checking procedures as well as to the duties of disclosure and market discipline.
Pillar 3 (disclosure and market discipline) is of virtually no interest to a bank´s clients.
Pillar 2 (checking procedures) is of importance in so far as any data which banks have to collect from their borrowers also have to be collected by the latter from their customers respectively. Thus, the requirements of pillar 2 have an immediate effect on a bank´s clients. SME therefore have to keep a critical eye on them.
Pillar 1 is the most interesting one. It reflects the minimal capital requirement, i.e. rules referring to the amount of equity capital by which banks have to secure the risks incurred when granting loans. The extent of the risk incurred by banks mainly depends on their respective default risks. The more risks a bank is ready to take when granting a loan, the more expensive loans will become for all of its clients. This means that risk-averse banks might prevail on the market since they are able to give out less expensive loans. Consequently this might cause a kind of loan hopping. This means that companies having consolidated themselves, thereby obtaining higher ratings, may easily change to a risk-averse bank which offers lower lending rates. The conventional mixed calculation of banks would soon become obsolete and banks ready to support start-up companies in new markets or companies proposing new business models might be pushed out of the market. It remains to be seen where Basel II will eventually lead to.