Basel III overlooks Asian banks
By Arush Chopra (The Philippine Star) Updated January 04, 2011 12:00 AM Comments (0) View comments
MANILA, Philippines - The Basel Committee’s study of the potential impact on banks as the new global rules on capital adequacy and liquidity is more about western banks’ future rather than Asian ones.
The Basel III rules about new global regulatory standards on bank capital adequacy and liquidity are finally here after several twists and turns. The Basel Committee on Banking Supervision (BCBS) said that, as a result of its new definition of capital that introduces the new capital standard of common equity Tier 1 (CET1) and a modified version of what constitutes Tier 1 capital, banks’ gross common equity tier 1 ratio will drop 5.4 percentage points to 5.7 percent for ‘Group 1’ banks, those with Tier 1 capital of more than $4 billion, while the corresponding decline for ‘Group 2’ banks, with Tier 1 capital lesser than this amount, the drop is set to be 2.9 percentage points.
In other words, the capital shortfall for Group1 lenders will fall short of anything between $220 billion at the BCBS’s prescribed lower limit of CET1 of 4.5 percent and $769 billion for the upper limit of seven percent, as per the banks’ balance sheets at the end of 2009.
So what does say this number crunching exercise about lenders in Asia? Not a great deal.
The global banking regulator made up of national regulators from 27 countries came up with these figures after looking at what 263 banks from 23 members countries told it about the impact of Basel III on their business.
Asia was grossly underrepresented with only about a fifth of the voices coming from the region and even those comprised developed economies such as Australia, Korea, Hong Kong, Singapore on the one hand and emerging markets such as India and China on the other.
Secondly, half of the Asian lenders who were a part of the reckoning fall into Group 2 so the potential decline they could face in their CET1 is limited to 2.9 percentage points, going by the BCBS’s calculation.
The Japanese banking system could be impacted the most but that is not surprising, given the fact that the country’s banks had the lowest capital levels in the region to begin with. According to the BCBS, nine of them could face a gross CET1 drop of 5.4 percentage points while another seven could face a 2.9 percentage point decline.
Chinese banks, which have been raising capital recently, have five lenders in each of the two groups while Korea is a little better off with only three banks in Group 2. Woori has the lowest Tier 1 among the banks in Korea, but it could use funds selling two regional banks that it owns to make up for the shortfall, although the government, which currently owns the bank, has not reached a reach a decision on it yet.
The results do not change materially our past assessment of the impact the new rules might have on Asia’s banking landscape. The development is unlikely to cerate a rush to raise capital in Asia, especially in countries such as China, Hong Kong, Singapore, Korea and India where the top lenders have anything between four to eight percent Tier 1 capital.
Although the BCBS has not looked at banks in Indonesia and Thailand, we have noted in the past and still maintain that they are well capitalized and have ample liquidity, and are also well positioned for Basel III. With their large deposit franchises, and with high profitability allowing them to use retained earnings to full effect, they are in good stead to respond to these demands.
Malaysia, a non-member country, stands to be more heavily impacted than the others by this rule change mainly because of the popularity of hybrid Tier 1 equity in their overall capital structures. Public Bank, in particular, could see capital drop below the stipulated levels with the new standards, and has already indicated the possibility of raising capital rather than reducing capital wastage by building capital-light business models and lowering dividend payments.
More generally, as banks will need to hold more capital and liquidity, the net effect on impeded lending activities would be to lower return on equity (ROE).
Banks in the region-especially Australian lenders, which tend to have huge portfolios of low yielding, relatively low risk, residential mortgages will need to adjust the focus of their businesses.
It is quite likely that banks might want to shift their portfolio balance away from these low-yielding assets towards high yielding assets in order to boost the ROE; ironically, this could have the effect of moderating them towards more risk business activities that seek additional gain, a mindset that would seem familiar to North American institutions in the Greenspan era of low interest rates that weren’t making any money from simply lending it out and sought opportunities for gain through financial innovation.
Also, lenders may reconsider being in certain business lines such as extending credit to SMEs, and start pushing into less capital-intensive activities such as wealth management, especially targeting the wealthy in Asia’s booming economies, as the cost of doing business goes up. The coming weeks and months should see these developments unfold, making 2011 an interesting year for banking in the region. Number of Group 1 and Group 2 banks in Asia in the BCBS’s quantitative impact study by country
Source: Bank for International Settlements.
By Arush Chopra (The Philippine Star) Updated January 04, 2011 12:00 AM Comments (0) View comments
MANILA, Philippines - The Basel Committee’s study of the potential impact on banks as the new global rules on capital adequacy and liquidity is more about western banks’ future rather than Asian ones.
The Basel III rules about new global regulatory standards on bank capital adequacy and liquidity are finally here after several twists and turns. The Basel Committee on Banking Supervision (BCBS) said that, as a result of its new definition of capital that introduces the new capital standard of common equity Tier 1 (CET1) and a modified version of what constitutes Tier 1 capital, banks’ gross common equity tier 1 ratio will drop 5.4 percentage points to 5.7 percent for ‘Group 1’ banks, those with Tier 1 capital of more than $4 billion, while the corresponding decline for ‘Group 2’ banks, with Tier 1 capital lesser than this amount, the drop is set to be 2.9 percentage points.
In other words, the capital shortfall for Group1 lenders will fall short of anything between $220 billion at the BCBS’s prescribed lower limit of CET1 of 4.5 percent and $769 billion for the upper limit of seven percent, as per the banks’ balance sheets at the end of 2009.
So what does say this number crunching exercise about lenders in Asia? Not a great deal.
The global banking regulator made up of national regulators from 27 countries came up with these figures after looking at what 263 banks from 23 members countries told it about the impact of Basel III on their business.
Asia was grossly underrepresented with only about a fifth of the voices coming from the region and even those comprised developed economies such as Australia, Korea, Hong Kong, Singapore on the one hand and emerging markets such as India and China on the other.
Secondly, half of the Asian lenders who were a part of the reckoning fall into Group 2 so the potential decline they could face in their CET1 is limited to 2.9 percentage points, going by the BCBS’s calculation.
The Japanese banking system could be impacted the most but that is not surprising, given the fact that the country’s banks had the lowest capital levels in the region to begin with. According to the BCBS, nine of them could face a gross CET1 drop of 5.4 percentage points while another seven could face a 2.9 percentage point decline.
Chinese banks, which have been raising capital recently, have five lenders in each of the two groups while Korea is a little better off with only three banks in Group 2. Woori has the lowest Tier 1 among the banks in Korea, but it could use funds selling two regional banks that it owns to make up for the shortfall, although the government, which currently owns the bank, has not reached a reach a decision on it yet.
The results do not change materially our past assessment of the impact the new rules might have on Asia’s banking landscape. The development is unlikely to cerate a rush to raise capital in Asia, especially in countries such as China, Hong Kong, Singapore, Korea and India where the top lenders have anything between four to eight percent Tier 1 capital.
Although the BCBS has not looked at banks in Indonesia and Thailand, we have noted in the past and still maintain that they are well capitalized and have ample liquidity, and are also well positioned for Basel III. With their large deposit franchises, and with high profitability allowing them to use retained earnings to full effect, they are in good stead to respond to these demands.
Malaysia, a non-member country, stands to be more heavily impacted than the others by this rule change mainly because of the popularity of hybrid Tier 1 equity in their overall capital structures. Public Bank, in particular, could see capital drop below the stipulated levels with the new standards, and has already indicated the possibility of raising capital rather than reducing capital wastage by building capital-light business models and lowering dividend payments.
More generally, as banks will need to hold more capital and liquidity, the net effect on impeded lending activities would be to lower return on equity (ROE).
Banks in the region-especially Australian lenders, which tend to have huge portfolios of low yielding, relatively low risk, residential mortgages will need to adjust the focus of their businesses.
It is quite likely that banks might want to shift their portfolio balance away from these low-yielding assets towards high yielding assets in order to boost the ROE; ironically, this could have the effect of moderating them towards more risk business activities that seek additional gain, a mindset that would seem familiar to North American institutions in the Greenspan era of low interest rates that weren’t making any money from simply lending it out and sought opportunities for gain through financial innovation.
Also, lenders may reconsider being in certain business lines such as extending credit to SMEs, and start pushing into less capital-intensive activities such as wealth management, especially targeting the wealthy in Asia’s booming economies, as the cost of doing business goes up. The coming weeks and months should see these developments unfold, making 2011 an interesting year for banking in the region. Number of Group 1 and Group 2 banks in Asia in the BCBS’s quantitative impact study by country
Source: Bank for International Settlements.