Asia’s banks face $1trn Basel III capital shortfall, says DBS chief

A combination of strong economic growth and the requirements of Basel III could leave Asian banks facing a $1trn capital shortfall within five years, according to Piyush Gupta, chief executive of Singapore-based lender DBS.

According an economic outlook report published by the Organisation for Economic Co-operation and Development in April, economic growth among Asean countries is expected to average 5.5% for the next five years, while there are also positive expectations for most other Asia economies – a process that will be accompanied by major infrastructure spending. In February this year, for example, Thailand announced a 2 trillion baht ($63 billion) seven-year plan to improve the country’s infrastructure.

The increasing size of Asian bank balance sheets as a result of these developments means that even though Basel III will not require banks in the region to increase their capital reserves in the next one or two years, the medium-term outlook could include a “meaningful capital shortfall”, according to Gupta.

“I’m somewhat concerned about how the global regulatory agenda may be affecting the Asian markets. The reason for this concern is that DBS recently had a study conducted that concluded the capital shortfall for financing Asia growth in areas such as infrastructure will be between a quarter of a trillion and a trillion dollars,” he says.

The large role played by state-owned banks in Asia, with the India, Indonesia and China market dominated by government-owned entities, means there is an additional set of complexities to raising capital on this scale, according to Gupta. Such a scenario could have a material impact on economic growth for Asian countries.

“Where does all this capital come from? Unless there are large-scale privatisations across a number of Asian states in the next five years – something I don’t see happening – then this cash has to come from the state. Some countries will be able to do this but deficit countries won’t. So the overall macroeconomic impact on Asia GDP growth could be meaningful over a five- to 10-year timetable.”

With only four Asian members of the Group of 20 (G-20), and a similar level of representation on the Basel Committee on Banking Supervision, market players have complained the global regulatory agenda pays little heed to the needs of Asia’s economies. Indeed, one Asean regulator told a recent Asia Risk conference that a representative of the Bank for International Settlements asked why his country “couldn’t just suck it up” when he complained about Basel III’s negative impact on his domestic economy.

However, Gupta argues that Asia has a voice at a global regulatory level, but a more co-ordinated response from market players and regulators around the region is required to make it heard. Referring to moves such as the UK financial regulator’s decision to relax capital requirements for small and medium-sized enterprise and commercial lending in order to boost loans to those sectors, he says it is possible for regulators to take a bespoke approach to Basel III without compromising its core values.

“Asia has representation on the G-20 and on the Basel Committee so it’s able to influence the global agenda. But you need to come up with an idea that doesn’t depart from the main approach, but instead is a discussion over how these issues impact Asia.”

Gupta gave the example of trade finance, which in Asia relies heavily on letters of credit. This instrument is penalised by the asset value correlation component of Basel III, which is intended to reduce the risk posed by simultaneous bank failures, not to increase the cost of short-term bank finance.

“It’s not the intent of Basel III to restrict Asia trade finance’s use of letters of credit, but that’s its impact. In this instance, Asian regulators need to either drive the global agenda by saying, ‘let’s take trade finance out completely’, or instead deal with this sub-component of Basel separately. There is an opportunity for Asian regulators to make the case on this.”


This article was first published on Risk

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