A concentrated bank could charge its largest borrower without pricing in everything that borrower consumes

Even when regulatory capital is ample, concentration could constrain loss-absorbing capacity first.

A large loan would consume capital, liquidity, and loss-absorbing capacity that would then be out of reach for the rest of the portfolio.

If the transfer rate covers only funding and interest rate risk, that consumption could be left out of the price. The bank could charge its largest borrower as it charges a small one.

With a Capital Allocation Decision System, the aim would be to evaluate together the decisions that share the balance sheet, with common assumptions, internal charges, and limits. Whoever approves the loan could check how much capital and liquidity it consumes before setting its price and its limit.

How much capital and liquidity does your largest borrower consume, and is that consumption in the rate you charge?

The full Perspective, with its sources, is available on request.