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Asia-PacificJuly 2 2006

STANDARD & POOR’S REPORT: S&P Pursues Enhanced Global Comparison of Capital Ratios

S&P seeks more accurate comparison of capital adequacy while BCG advises foreigners on starting out in China.
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As implementation of Basel II becomes a reality, Standard & Poor’s (S&P) Ratings Services is exploring ways to facilitate better international comparison of capital adequacy under the new regime. S&P believes the implementation of Basel II risk-sensitive regulatory capital measures by 2007-2009 is a positive development. But it also thinks that despite clear progress towards achieving a more risk-sensitive measure, banks’ capital ratios under Basel II will have less comparability than generally thought.

S&P says besides multiple options for national discretion in applying the rules, the move to a regulatory system that allows several approaches to measuring the same type of risk creates potential for significant inconsistencies among banks’ capital requirements, even within the same country.

Increased disclosure required by Basel II Pillar 3 to promote market discipline, although still unclear in its extent, should provide valuable information on banks’ risk profiles and risk management systems. Explicit disclosure of the main components of ratio calculations, including key data by asset class, will be necessary to identify areas of inconsistencies among banks. This process will require time for the building of expertise.

S&P intends to leverage on the expected improved information available to track inconsistencies and explore ways of adjusting Basel II ratios. BCG REPORT Banking on China: Successful Strategies for Foreign Entrants According to the latest Banking on China report by Boston Consulting Group, in 2004-2010: “China is expected to generate approximately $130bn – or more than one quarter of the increase in annual global banking revenues.” Banking activities will be fully open to foreign players by December 2006. Yet BCG warns foreign banks wishing to enter the market not to underestimate the challenges. Post-2006, the regulatory environment will remain highly uncertain. Furthermore, structural “megatrends” in the country’s still immature sector are emerging on which it is important not to miss out. Key to success is to establish a sound multi-tier strategy within a framework of two main pathways of entry: a strategic alliance with a local player and organic growth. The first opens markets but limits operational control, the second secures control but leaves foreign players at the mercy of the regulatory environment. BCG recommends three steps to establish a winning strategy in China: first, focus on your core competitive advantages; second, define your target position precisely; third, chart multiple pathways to achieve this target. It stresses that foreign entrant strategies must be long term: internal commitment at the highest management levels is crucial. Finally, BCG advises: “Secure a manageable position before establishing a broader presence.”

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