Many Asia-Pacific banks lag on capital accord
HONG KONG - The majority of banks in the Asia-Pacific region are only at the earliest stages in their planned implementation of the new Basel capital accord, or have not yet even started.
And, an even bigger majority of institutions do not think that the local regulatory authorities have been particularly helpful in the guidance that they have provided about compliance with the accord.
These are among the findings of a survey conducted by the HK arm of the professional services group Ernst & Young (E&Y), published in December.* The survey into banks' readiness for the introduction of the risk-based capital accord - Basel II - which is aimed at increasing the safety of the world banking system, was carried out between mid-November and early December last year. Some 245 participants from 12 Asia-Pacific countries are claimed to have responded, including risk and compliance officers, chief financial officers, treasurers and the like.
Almost two-thirds (65%) of respondents reported that their banks had not got far with Basel II implementation plans or not started. Around 20% of banks in the region have not yet confirmed which of the three options to measuring credit and operational risk they intended to adopt. However, two thirds of banks believe that their competitiveness will increase in the medium and long term because of their compliance with Basel II, the survey suggests. Some 40% of banks expect their credit risk capital charge to go down once they have implemented the accord, while 50% think their total capital costs (taking operational and credit risks together), will go up.
This all points to significant gaps in preparedness between Europe and North America, where banks are most advanced, and all but "a few handfuls of Asia-Pacific-based banks," comment the survey's authors Phillip Straley, a partner in E&Y's global financial services risk management practice, and Eric Hansen, a senior manager in the same practice.
Banks that are following the schedule agreed by regulators on the Basel Committee, architect of Basel II, are due to start putting the accord into effect in three years' time.
Despite the apparent tardiness of many of the region's banks, the survey clearly indicates that awareness of Basel II, and preparation for it, have increased significantly over the past two years, say Straley and Hansen in a review of the survey findings. Overall, they say, levels of bank preparedness for Basel II are widely diverse. While smaller banks generally lag far behind, better prepared banks in the region are well into their implementation plans. "We expect at least second-tier banks to be playing a fast catch-up game during 2005. Small banks as a group will continue to lag behind and will need to understand and manage the consequences," the authors say.
Among those represented in the survey, Australian and Singaporean banks are generally viewed as among the most advanced in their Basel II preparation, although the survey does not identify progress by country. Chinese regulators, meanwhile, have announced that their banks will not be fully implementing Basel II for some years. Other countries represented in the survey include, Japan, India, Hong Kong, Malaysia, Taiwan, South Korea, Indonesia, Philippines and Thailand.
One reason why many banks in the region are lagging over implementation may be the role of local regulators. Some 70% of banks surveyed perceived the local regulatory guidance that they have received as only "fair" or worse. Around 60% of banks have had no, or only limited discussions with their regulators about pillar 2 and pillar 3 of the capital accord. While pillar 1 sets the minimum capital that banks must hold, pillar 2 deals with regulatory oversight of their risk management systems, and pillar 3 involves information disclosure to the public and market discipline. More than four-fifths of banks have not started yet, or are at only early stages in regards to implementing pillar 2 and 3 requirements, the survey reveals.
It also shows that 63% of banks initially intend to adopt the simplest approach or intermediate approach to measuring their credit risks. But over half are aiming to comply with the most advanced measurement approach by 2010. Similarly, 65% of banks are initially intending to adopt the simplest and intermediate approaches to measuring their operational risk. But over half aim to meet the requirements of the most advanced approach by the end of the decade.
The survey also shows that the business benefits of Basel II compliance are the main motives for banks undertaking implementation. Enhanced reputation/market perception, the ability to use risk-based pricing and improved portfolio management capabilities are seen as the top three areas of potential business benefit. Regulatory capital relief comes only sixth in the list of main benefits, after credit loss reduction and greater operating efficiencies/lower expenses.
*Asia-Pacific Basel II survey
European Commission will enforce new capital rules
FRANKFURT - Implementation of the EU's Capital Requirements Directive, aimed at underpinning the solvency of Europe's banks and investment firms, will be a key test of the 25-nation bloc's ability to put its ambitious financial programme into practical effect.
Implementing and enforcing existing EU legislation is now the priority. "We must avoid re-fragmentation of the internal market, or dilution of what has already been achieved by different, erroneous, selective or partial interpretations of Community law in the member states in the process of transposition," Charlie McCreevy, the new European Commissioner for Internal Markets, told a financial audience in Frankfurt, just before Christmas.
"We must do our utmost to prevent this happening."
The overall objective of European Commission staff will be to see that the legislative measures supporting the Financial Services Action Plan are implemented in a synchronised way and operate effectively in practice, McCreevy said. He cited the Capital Requirements Directive (CRD), which transposes the new Basel capital accord - Basel II - into EU law, as the key test. Despite he difficulties that had been reported in the press, McCreevy said he shared the hopes of the finance industry that the CRD will be "adopted by the European Parliament by next summer."
He was addressing a meeting of the founders of Initiative Finanzstandort Deutschland (IFD), a coalition of 17 German financial groups set up in the summer of 2003 to promote an integrated European financial market.
Taking up one of the most controversial aspects of the CRD, McCreevy said he and his colleagues wanted the concept of the "consolidated supervisor" to work and cross-border financial groups not to be "subject to multiplicative requirements." This refers to the much-contested article in the CRD that gives new powers to the lead supervisor - usually the home supervisor - of a financial group with operations in several EU member countries. Supervisors from all the countries in which such a group has offshoots must decide within six months who is going to validate the risk models that the group uses. If they cannot agree, the "consolidating" or lead supervisor is empowered by the CRD to do it. Financial groups strongly back this idea because it should reduce the number of supervisors they deal with. But many host supervisors are opposed because they believe it reduces their sovereignty.
McCreevy said he needed the finance industry to tell him when "things are not working. "I am convinced the IFD and its members can play a very important and helpful role in this. The sooner you alert us, the easier it is for us to avoid any damage to the integration project." He appealed for financial firms to be more active than in the past. "If everyone behaves like blushing virgins in the corner - the prince, the prize will go elsewhere," the commissioner said.
Striking a determined note, McCreevy said: "I am confident that this cooperative relationship will lead to considerable achievements over the coming years. However, if it does not - I will deploy the full legal battery the European Commission has at its disposal to enforce what we believe are the correct and intended rules."
