Working Paper: Basel III and Asia

Key Messages

• We need to be aware that Basel III is but one set of rules that took on prominence in response to the global financial crisis. Our study showed that Asian banks are being unduly constrained and challenged with an uneven playing field. While Asian banks are not capital-constrained in the short-term, their ability to support growth and credit demand is significantly impaired in the medium term.
• Asian regulators should consider tailoring Basel III implementation through the appropriate exercise of national discretion, uniformly applied to all banks operating in their jurisdiction.
• Asian regulators should also have a dialogue with the relevant regulatory authorities to ensure that advanced country application of national discretion and exemption are exercised in a transparent manner, so that all national regulators have the opportunity to assess how these national discretions affect competitiveness and global systemic risks.
• There is a host of other complex financial regulations (with cross-border implications) such as Dodd-Frank, FATCA, IOSCO and Solvency II that have to be considered, as well as those (yet-to-be-defined) rules intended to regulate shadow banking activities. The combined effect of all these regulations, complex, undefined and wide-ranging in coverage, will surely weigh down the banking system. The full consequences of adopting numerous global financial regulations, intended for globally systemic institutions will have huge implications, especially for Asian economies which have different national priorities due to different stages of development. Many issues have yet to be thought through thoroughly.
• When implementing Basel III, there is a need for a clear distinction between national discretion standards and global rules. If every national authority, especially the advanced economies, were to set out complex exceptions to Basel III, then there is a risk that Basel III is implemented only in name but not in practice. These national exceptions are going to make comparability across jurisdictions very complex.
• Therefore, Asian regulators and banks need to look beyond Basel III. Financial stability and soundness of the banking system depends very much on growth of the economy. The Asian economies are already struggling to grow amidst managing the repercussions of quantitative easing and decline in external demand on the domestic economy. Growth is challenged because Asian economies are struggling with the change in the domestic business model from exports towards creating internal demand, which requires a different set of funding, including the phasing out of excess-capacity industries. There is today greater emphasis on financial inclusivity (especially financing the SMEs) to ensure greater social justice and job creation. Different jurisdictions will have different priorities, apart from implementing complex Basel III risk-models (and a host of new, undefined regulations), in changing the systems to manage new risks and promote new growth opportunities. Philosophically, risk comes together with growth and we cannot concentrate on risk minimization without understanding that risk transformation is the function of the banking industry.
• To sum up, Basel III is only the first of a whole host of regulations that will impact on the banking industry in Asia. A major consideration is whether different implementation phases by the advanced economies, including different interpretation, risk-weights and treatments by national regulators will create a level playing field for emerging markets.
• In trying to implement Basel III, national regulators need to take into consideration not only national bank competitiveness on a level playing field, but also national growth and job creation issues. Hence, there is need for greater transparency on how the Basel Committee deals with national treatment and interpretation, so that all players are assured that there is a level playing field.

The views expressed in this article are the author's own and do not necessarily reflect Fung Global Institute's editorial policy.