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What Basel III means for Asian banks
The Basel Committee on Banking Supervision latest announcements which more than doubles lenders’ capital requirements but gives them as long as eight years to fully comply, has cast a bearish gloom on banks globally. However, as far as Asia-Pacific Banks are concerned, we maintain that lenders outside Japan are reasonably well-positioned to weather the impact of the new rules.

December 21, 2010 | Aditya Puri

The Basel Committee on Banking Supervision latest announcements which more than doubles lenders’ capital requirements but gives them as long as eight years to fully comply, has cast a bearish gloom on banks globally. However, as far as Asia-Pacific Banks are concerned, we maintain that lenders outside Japan are reasonably well-positioned to weather the impact of the new rules.

The development is unlikely to create 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 4-8% of Tier 1 capital. Banks in Indonesia and Thailand are well-capitalised and have ample liquidity, and also well positioned for Basel III. With their large deposit franchises, and with high profitability allowing them to use retained earnings to full effect, Asian banks are in good stead to respond to these demands. Japanese banks, however, with the weakest capital levels in the region and poor overall profitability, are likely to be the most impacted.

Among other markets, Malaysia stands out as likely to be more heavily impacted than the others by the 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. In Korea, Woori has the lowest Tier 1 among the banks there, but it could sell two regional banks to make up for the shortfall. Also, some European names operating in the region will need to strengthen the composition of their Tier 1 assets.

The Bank for International Settlements, giving banks as long as eight years to comply with the new standards, has suggested a time...

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Categories: Capital & Strategic Issues, Risk And Regulation Working Group
Keywords: Market Risk, Regulation