15 10. 2014
DBS Chief Warns of Basel Fallout
As Asian countries roll out Basel III frameworks for their banks, the CEO of Singapore’s biggest lender has warned that the more stringent bank capital rules for the already wellcapitalised local lenders may hurt economic growth in the region.
“Asia’s banking system is already strong as (banks) generally emerged unscathed from the global financial crisis. If the new rules try to make it super strong, what gives is the capacity of the banks to provide credit,” said Piyush Gupta, CEO at DBS.
Gupta’s warning comes amid mounting frustration among Asian bankers that the third version of the Basel framework is a poor fit for the region’s fast-growing emerging markets. In particular, critics argue that high risk weightings for emerging-market lending mean that Basel III is pushing up the cost of capital for Asian banks unnecessarily, ignoring actual default rates and the fact that many banks in the region already enjoy significant state support.
The Asian Development Bank expects developing Asia to expand 6.2% this year and 6.4% next year, much higher than growth rates in Europe and the US. Loan growth in the region’s still developing banking system has historically trended above nominal GDP, putting Asian lenders under pressure to expand loan books at a time when many also need to boost their regulatory capital ratios.
“The regulatory regime leans heavily towards the stability agenda and the growth path of Asia will definitely be compromised,” Gupta said.
Asian banks will need to raise US$250bn of capital come 2017 to meet Tier 1 capital requirements, assuming a conservative loan growth rate of 10.2%, according to a joint report from Hong Kong-based think tank Fung Global Institute and Singapore-based Stamford Advisory. The largest capital gap, of US$100bn, is in India, where the economy is expected to grow 5.6% this year and a further 6.5% in each of 2015 and 2016 in real terms, according to Fitch Ratings.
As a consequence, Asian countries may face higher risks of slower economic growth due to constrained bank lending, said Ng Ngai Kin, managing director at Stamford Advisory.
“We should be cognisant that Basel III rules changes could have unintended repercussions on sectors and assets critical to Asia’s growth, such as lending to SMEs, infrastructure projects and trade finance,” he said.
Using DBS as an example, Gupta believes Asian banks are much better capitalised and take more conservative approaches to building their balance sheets than their Western peers.
“Asia went into the economic crisis from a different position than their Western counterparts. The fundamental differences were two: our capital levels were much stronger and had been so ever since the 1997 crisis, and the securitised markets and large off-balance sheet transactions did not exist in our part of the world,” he told IFR.
“Much of the medicine that is being created globally is more suitable to Western (banks), but is just the wrong medicine for the wrong patients in Asia,” he said.
While a conservative lending strategy helped Asian lenders weather the last financial crisis, a similarly conservative approach to capital requirements threatens to put them at a disadvantage relative to global peers.
Generally, Asian banks have much higher ratios of risk-weighted assets, at over 40% of their total assets, compared to around 20% for European banks, according to the Fung/Stamford research, which puts the ratio for DBS among the highest at 60%.
Capital adequacy rules require banks to maintain a percentage of their RWAs as regulatory capital, so a higher RWA-to-total assets ratio means a bank must set aside more resources or cut its lending to maintain the same capital adequacy score.
As at the end of June, Deutsche Bank had a RWA-to-total assets ratio of 24% versus ICBC’s 58.4%, according to regulatory filings. Asian banks typically lend in countries with low sovereign ratings, accumulating assets that carry high risk weightings under the standard application of Basel III rules. They have also been slower than global peers to use internal risk ratings to calculate RWAs, based on their own experiences, a move that will reduce risk weightings and improve capital ratios, experts say.
Doing so, however, would require significant investment in technology and risk management, as well as the signoff of local regulators still taking time to understand the Basel requirements. China’s banking regulator only recently allowed the country’s biggest lenders to use internal models.
High capital charges on minority investments also make it harder for banks like DBS to expand in Asia, where regulators are reluctant to allow foreign ownership in their banking systems. DBS abandoned a US$6.5bn bid for Indonesia’s Bank Danamon last year after winning approval for a stake of only 40%, while many global banks sold their stakes in China’s state-run lenders in the wake of the 2008 financial crisis.
“There should be optimal capital for each bank. Too much capital on banks’ balance sheets could slow down economic growth,” said Sumit Agarwal, Low Tuck Kwong Professor at the business school of National University of Singapore, who spent six years as senior financial economist at the Federal Reserve Bank of Chicago.
Stronger Asian voice
As European and US bank regulators primarily drafted Basel III rules, Asian counterparts need to have a larger presence in the decision making, Gupta said.
“We need to have a stronger Asian voice in the Basel committee,” he said. ”Most of the agenda has been dominated by EU and supplemented by the US. Noticeably absent are large Asian countries, including China and Japan. We don’t have a local think tank or point of view that we can go to and make our own case. That is something that needs to change.”
European and US bank regulators have more power in the Basel committee and, therefore, they managed to get more carve-outs for their banks, according to Agarwal.
“Among the Asian regulators, only Japan has some say, but because of its economic malaise, its power has been declining,” said Agarwal. “Whether a jurisdiction gets away with special deviation from Basel III rules depends on how much power its regulator has on the Basel committee.”