Asia should beware of wholesale accord adoption
HONG KONG - Most Asian bank supervisors are likely to implement the new risk-sensitive capital accord - Basel II - as a key part of their supervisory regimes.
And the larger banks in most countries are generally aiming to go beyond the adoption of the simplest approach (the Standardised approach) to the measurement of their credit risk. They are intending to adopt one of the internal ratings based (IRB) approaches, concludes ratings agency Fitch Ratings in a special report entitled Asian Banks and Basel II, published in late January.
The IRB approaches are likely to be adopted in the more developed banking systems (Japan, Hong Kong, and Singapore) starting around 2007 to 2008, and in others in subsequent years, says the report, prepared by a group of senior Fitch bank analysts, and based on discussions with banks and bank regulators in eleven countries around the region. Since publication of the report, India has announced that its banks will adopt the Standardised approach from March 31,2007 (see page 14).
Fitch says that, while over time the adoption of the IRB approaches should lead to better risk management practices, the rating agency believes that developing the risk rating systems and infrastructure needed to become an IRB bank could pose challenges for a number of Asian institutions, most of which are in the early stages of building up their loss databases, developing ratings models and improving the integrity of their risk management systems.
Demonstrating some scepticism that a straight adoption of Basel II will necessarily always be the best policy for Asian countries, the Fitch analysts say national supervisors should not simply import the capital rules wholesale, but "adapt them to local realities." Asian supervisors "will have to consider carefully whether the assumptions built in to Basel II are applicable to their banking systems. If in their view the [capital] charges do not fully capture the risks inherent in local markets, supervisors could either decide to apply more conservative assumptions within the capital calibration for specific assets (such as applying higher risk weights than Basel II), or set overall capital requirements at a higher level than 8%," say the analysts led by David Marshall, head of financial institutions, in Hong Kong.
The analysts note, for example, the recent problematic experience of some areas of retail lending, such as with credit cards in South Korea, "might suggest that additional capital is needed to cover the risks of this market."
The report, which considers the application of Basel II in China, India, South Korea, Taiwan, Hong Kong, Japan, Singapore, Malaysia, Thailand, Indonesia, and the Philippines, also displays some concern about whether the resources that supervisors will require to police Basel II might be better used. Implementing Basel II and supervising IRB banks will present challenges for Asian supervisors, who will need more technical skills and resources. Fitch's view, say the analysts, is that "countries in Asia that are planning to adopt Basel II should think carefully about these resource needs and consider the benefits and costs of Basel II adoption within the broader context of their other supervisory priorities. For example, strengthening the fundamentals of their legal and regulatory infrastructure is likely to be a more immediate priority than - and indeed an important precursor to - moving to introduce Basel II."
