Asian banks also feeling heat of Basel III regulatory obligations

Asian banks also feeling heat of Basel III regulatory obligations

Banks around the world are finding that rapidly evolving regulatory changes are taking up a good amount of their attention.

While more acutely felt in Europe and the US, given the impact of the Global Financial Crisis (GFC) in these regions, changes are being increasingly felt among banks operating in Asia as well.

Changes in the regulatory frameworks following the GFC are leading to considerable changes in business models of these banks in Asia - both in the Asian offices of global institutions, as well as domestic Asian players.

The most pervasive of these changes is the implementation of the norms commonly known as Basel III.

Asian centres have been closely involved in Basel Committee discussions - Australia, China, Hong Kong, India, Indonesia, Japan, the Republic of Korea and Singapore are all members of the Basel Committee on Banking Supervision (BCBS). Many countries in Asia are implementing components of Basel III even as regulators in Europe and the US contemplate the start dates and the banks that should be subject to these norms.

Indeed, many Asian countries have already put regulations in place to phase in the Basel III requirements from the beginning of this year. In some cases (notably China, India and Singapore), there will only be a few deviations from the Basel III timetable and with higher minimum capital requirements than are set out in Basel III.

While there is general agreement on the capital standards, there are however important differences in implications for Asia when compared with the West. These lie in the relative priorities of some elements of the regulatory changes within Asia; particularly in the areas of liquidity and the centralised clearing of over-the-counter (OTC) derivatives.

Yet, the 'Basel' story in Asia is not just about Basel III but also very much about Basel II. Many banks in Asia have only implemented either the standardised approach or have not implemented Basel II at all.

Only Australia, Hong Kong, India, Japan, Korea, New Zealand and Singapore have already implemented Basel II in full, including allowing banks to apply for the use of their own internal ratings based (IRB) models to calculate capital requirements for credit risk.

Banks in countries where Basel II is not implemented, or where only the standardised approach to credit risk is used, are faced with additional challenges. Basel II imposes conservative and broad-brush risk-weightings for some key components of a banks' portfolio such as trade finance, SME lending and infrastructure finance.

It has been suggested that these higher risk weights may discourage banks from lending to these sectors. The cost of borrowing may also be higher to borrowers than the historical loan-loss experience; and the availability of such finance may be limited.

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