The Hidden Cost of Being a “Good” Borrower

Core Strategic Insight

Your low risk profile reduces the bank’s costs, but your loyalty maintains their price.

In modern banking, a client’s profitability is determined by the gap between the interest charged and the regulatory capital required to hold the loan. Safe borrowers require minimal regulatory capital (Risk-Weighted Assets, or RWA). If these borrowers remain passive, they generate astronomically high ROE for the bank—far exceeding that of riskier clients. Consequently, the “safe and silent” borrower becomes the primary engine of bank profitability, often subsidising the aggressive rates offered to acquire new business. This is the Loyalty Tax.

Diagnostic Analysis

1. The RWA/ROE Trap: Why Good Borrowers Pay More (Relatively)

Under Basel III and its “Endgame” implementations (fully effective in many jurisdictions by 2025–26), banks are constrained by capital efficiency. For a bank, the cost of lending is driven by the Risk-Weighted Assets (RWA) calculation. A high-quality corporate borrower might attract a risk weighting of only 20% to 50%, whereas a riskier SME might attract 100% or more.

Herein lies the paradox. If a bank lends to a risky client at 6% with a high capital charge, the ROE might be 12%. If they lend to a safe client at 4% but with a tiny capital charge, the ROE can exceed 25%. Banks represent this safe client as a "Cash Cow." As long as the safe client does not negotiate, the bank captures the entire surplus generated by the client's own creditworthiness. Recent analysis of European lending portfolios during stress periods confirmed that banks charge significant markups to safer borrowers to cross-subsidise weaker ones (Artavanis et al., 2024).

2. The “Passive Renewal” and Inertia Pricing

Banks employ sophisticated churn models to predict “flight risk.” These models weigh tenure heavily. A borrower who has been with the bank for 10+ years, uses ancillary services (payroll, FX), and renews facilities without going to tender is flagged as highly inelastic. In 2025 data, we see that “inactive” households and firms—those who do not switch or renegotiate—pay significantly higher rates than active switchers, a phenomenon well-documented in mortgage markets but equally prevalent in commercial lending (Fisher et al., 2021). The bank effectively monetises your reluctance to complete paperwork.

3. The Transparency Penalty: Why “Open Book” Fails

Founders often believe that providing unaudited management accounts early or giving the relationship manager (RM) full visibility into the pipeline builds trust. Structurally, however, this creates an Information Monopoly (Hale & Santos, 2009). When an incumbent bank possesses private soft information that competitors lack, they can “hold up” the borrower. The incumbent knows the credit is safe, but outside competitors, facing information asymmetry, must price in a risk premium. Consequently, the outside offers are naturally higher, and the incumbent need only match that higher price—not the true risk-adjusted price. By failing to formalise a competitive tender where information is released simultaneously to multiple parties, the “transparent” borrower inadvertently strengthens the incumbent’s pricing power.

Strategic Implications

For CFOs: The Annual Market Test

The concept of "relationship banking" is mathematically valid only when the relationship confers benefits like emergency liquidity or covenant waivers during distress. In a stable environment (2026), the relationship premium is often deadweight loss. CFOs must institute an annual “Market Test” policy. This does not require moving banks annually—which is operationally expensive—but requires simulating a tender. By soliciting a term sheet from a challenger bank every 12 months, you generate the hard data point required to force your incumbent’s pricing model to recalibrate.

For Founders: Vendor vs. Partner

Stop treating your bank as a partner. In the Basel III regime, they are a vendor of capital, selling a commodity product. Partners share risk; vendors price it. When you treat the bank as a partner, you tend to over-share soft information (plans, worries) which the bank’s credit officers use to accurately gauge your switching costs. If they know you are too busy to switch, they will not offer the optimal rate.

Negotiation Scripting

Do not ask for a “rate review.” Ask for a “Competitiveness Check.” The specific language matters:
“We value our long-standing relationship, but our board requires us to benchmark our capital costs annually. We have received an indication of [X%] from a competitor. Before we proceed with formal due diligence with them, we want to give you the opportunity to align our current facility with this market rate.”
This frames the request as a governance requirement (external pressure) rather than a personal grievance, reducing relational friction.

10-Step Roadmap: The Repricing Protocol

Regional Lens

• United Kingdom: The implementation of the "Basel 3.1" standards by the PRA (July 2025) has increased capital sensitivity. However, the UK market features high transparency on "Standard Variable Rates" (SVR), making the inertia penalty particularly visible (Fisher et al., 2021).
• USA: The fragmented banking market (4,000+ banks) offers more leverage options, but the "Basel III Endgame" proposal has faced pushback, creating uncertainty. US banks are currently very aggressive on deposits but conservative on lending spreads.
• Australia/NZ: Highly concentrated "Four Pillars" markets mean true competition is lower. Here, the threat of switching to non-bank lenders (private credit) is the most effective lever.