Australia, Singapore lead Asia-Pac on capital rules
MELBOURNE - Australia and Singapore are the Asia-Pacific countries where banks are making best progress towards the implementation of the new, risk-based Basel capital accord.
And even these banking systems must still "contend with significant challenges in meeting implementation timetables," says a report from Standard and Poor's credit rating agency, published in late February.
It notes good progress in some other countries, too, including Hong Kong and Japan. Elsewhere, South Korea, China, Thailand and Malaysia are opting for more gradual and phased implementation of the new accord - Basel II. As in other parts of the world, the development of robust data and systems to enable transition to Basel II is uniformly the major challenge for Asia-Pacific banking system, says the report written by an S&P team of regional credit analysts led by Melbourne-based Gavin Gunning.
The extent to which Asia-Pacific banks will see their capital requirements rise or fall under the new capital regime remains unclear. Lower capital charges for credit risk are offset by the capital requirement for operational risk in some countries. As in other regions, retail mortgage banks have the potential for the greatest cuts in risk-weighted assets under Basel II.
But whether a reduction in risked-weighted assets will translate into a reduction in bank capital, with no change in credit ratings, is not yet certain, says the report.
In Australia, the relative high percentage of mortgage lending over the total loan book should result in a reduction in risk-weighted assets, indicating the potential for a decline in regulatory capital levels. However, S&P maintains its view that "there is not an excess of surplus capital in the Australian banking sector, and that there is limited scope for a material decrease in capital for most institutions at current rating levels."
Meanwhile, Basel II is likely to have "a limited effect on the capital levels of a majority" of banks in Japan, although those Japanese banks that have been under-reserving against bad loans will be under pressure to top up their capital, the analysts say. The proportion of Japanese banks planning to implement, from the outset, the advanced internal ratings based (A-IRB) approach to credit risk measurement under Basel II - the most sophisticated of the three available approaches - is smaller than in other developed countries. Japanese banks are still struggling to collect data and develop analysis based on definitions of the Basel II rules. Japan's banks have also undergone large scale mergers, which pose a further challenge in consolidating the different risk management systems.
A concern voiced across the Asia-Pacific region by institutions adopting the standardised approach - simplest of the three available Basel II credit measurement approaches - is that they will be competitively disadvantaged compared with institutions adopting the A-IRB approach. However, S&P says there is "unlikely to be major credit ratings implications" for a banking system or individual banks merely because they adopt, or do not adopt, Basel II. "Nor should there be any such implications for those banks adopting" the simpler rather than the more complex, A-IRB approach to its risk measurement, the analysts say. But overall, S&P views Basel II "as a positive development that will contribute to an improvement in risk management in the global financial services sector."
