Issue Brief: Asian Banking: Moving Beyond Basel III

Asian banks are well capitalized and many Asian jurisdictions have moved beyond Basel III - with higher capital requirements and ahead of the January 2015 deadline. Indeed, nearly half of all jurisdictions currently implementing Basel III are Asian. Adhering to Basel III ahead of others raises questions about a level playing field for Asian banks, especially since Basel III was largely designed to address the crisis-related problems of the more advanced and sophisticated financial markets. Asian banks are still retail deposit-based, and less reliant on wholesale funding. Many Basel III rules on liquidity, risk weights and overall leverage ratios are still being finalized, and the real effects of Basel III on Asian bank lending could be clouded by the current environment of ample global liquidity. As growth expands, the need for additional capital increases could be substantial. Hence, Asian policymakers need to balance growth with regulation in a judicious manner without negative implications on Asian systemic stability. This requires:

• Exercising judicious national discretion in tailoring Basel III implementation that is risk-appropriate for individual economies. The aim is not to selectively implement prudential rules, but to focus on risk exposures that are different for each country, while minimizing unintended consequences.
• Seeking alternative ways to strengthen growth and fund debt, for example, by improving financial infrastructure and supporting capital market deepening to increase equity financing.
• Reducing over-reliance on bank credit by promoting long-term institutional investors to finance Asia's long-term development.
• Looking beyond Basel III to address emerging risks from shadow banking and the impact of volatile capital flows, as well as the implications of "mobile" money creation outside of the regulated financial system.

The aim is not to dilute prudential regulations, but to ensure that the complex Basel III regulations are fit for purpose, and commensurate with the different stages of development and risks in Asia.

Disclaimer: The views expressed in this report are those of the author and do not necessarily reflect those of the Fung Global Institute. The author is solely responsible for any errors or omissions.