Asia’s risk professionals warn of unintended consequences of Basel III

Basel III rules may cause banks to reduce lending, worsening the economic slowdown, warn risk professionals in Asia-Pacific.

The Basel III rules might cause banks to cut back lending and reduce the size of their balance sheets, worsening the economic slowdown, caution risk professionals in Asia-Pacific. A number of other unintended consequences could also emerge – for instance, a battle for retail deposits and a lack of global consistency, they add.

The comments come one year after the Basel Committee on Banking Supervision published its final rules on capital and liquidity last December. While regulators have set an eight-year transition period, with Basel III only coming into full effect from 2019, some participants say market pressure will force banks to comply earlier – a trend already emerging at some banks.

“Implementation is, in many cases, taking place much quicker than the eight-year glide path set out by the Basel Committee, and this would tend to exacerbate the negative effect on growth,” says Simon Topping, partner in the financial management practice at KPMG in Hong Kong. “A further negative is that many banks seem to be raising their capital ratios by cutting lending and offloading assets, rather than by raising new capital and continuing to lend.”

Others warn about a lack of consistency between jurisdictions, with individual regulators adding to the regulatory minimums. “Aside from the significant expected impact of Basel III, what worries me is a different possibility: regulators only agreed with the minimum requirement under Basel III, and decided to introduce whatever they believe is necessary within their own jurisdiction by themselves, on top of Basel III. This could be capital, central clearing, liquidity or derivatives regulations. This gives rise to the risk of fragmented rules. This is not only cumbersome for global financial institutions to follow, but also counterproductive to the sustained growth of the global economy,” says Kenji Fujii, head of global risk management group at Mizuho Securities in Tokyo.

There could be other unintended consequences – for instance, the preferential treatment given to retail deposits under the liquidity coverage ratio could spark a bidding war as banks try to win new depositors. “For example, banks could bid up deposits (such as retail deposits) that receive favourable treatment under Basel III. In addition to creating deposits that are more volatile and rate-sensitive, this could result in higher funding costs for the banks, translating into higher lending costs to customers or reduced lending capacity,” says Gilbert Kohnke, chief group risk officer at OCBC in Singapore.

Regulators acknowledge some of the concerns – and say how banks transition to Basel III will be almost as important as the capital level attained. “Deleveraging should not rely just on fire sales of assets, but should be done through a proper combination of continued credit supply to potential growth areas in the economy, careful restructuring of viable borrowers in difficulty, and resolution of non-viable borrowers,” says Ryozo Himino, deputy commissioner for international affairs at the Financial Services Agency (Japan) and chair of the Basel Committee’s standards implementation group.


This article was first published on Asia Risk

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