The pandemic and the war in Ukraine have delayed the implementation of Basel III in many markets, with push backs coming from some of the biggest economies. In Asia, as some jurisdictions move ahead, it risks creating an uneven banking sector that the rules were trying to avoid. Kimberley Long reports. 

When the Bank for International Settlements’ (BIS) Basel Committee on Banking Supervision (BCBS) announced in March 2020 that it was pushing the Basel III deadline back by one year to January 1, 2023, due to the impact of the Covid-19 pandemic, it gave some welcome breathing space.

Most regulators followed suit to provide their financial institutions with extra time for implementation. In November 2021, the Bank of England’s Prudential Regulation Authority (PRA), for example, announced that it had postponed implementation until after March 2023, saying that its ability to meet the timeframe was impacted by the pandemic. The PRA later confirmed a target date of January 2025, in line with the deadline announced by the EU in October 2021. 

Although not officially announced, there have been reports that the US is also pushing back its implementation to 2025. 

While giving some scope for later implementation, the BCBS has cautioned there is a risk to the level playing field that Basel III was supposed to create for international banks if the policy is adopted at different times. 

Japan’s delay 

Asia has also seen a rash of postponements. For example, Japan announced it would push its deadline for its megabanks, namely Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, to the fiscal year ending March 2024. Its smaller regional banks had already seen their deadline extended to the fiscal year ending March 2025.  

A spokesperson for Japan’s Financial Services Agency (FSA) says: “While the FSA has committed to implementing Basel III and has prepared for its implementation from 2023, we acknowledge that, in some major jurisdictions, the Basel III implementation is expected to be delayed for the internationally agreed timeline. In order to provide a regulatory level playing field for Japanese banks, the FSA decided this March to require internationally active banks, and banks that use internal models, to report Basel III-based ratios from March 2024.” 

While the deadline has been extended, banks that are already prepared can implement the rules earlier. 

“In Japan, internationally active banks are required to report Basel III-based ratios from March 2024, but banks are allowed to report them from March 2023,” the FSA spokesperson says. “Several banks showed us their willingness to do so. From the banks that will report them from March 2024, we have not heard of major obstacles to the Basel III implementation.” 

While domestic banks do not have to report until March 2025, they can do so from March 2023 if they are in a position to do so. The FSA spokesperson says they expect some of the domestic banks to begin reporting from the earlier deadline, adding: “Further dialogues with these institutions will be conducted later, but [again] we have not heard major obstacles to the implementation from them.” 

Uneven risks 

While Japan has held back, other key Asian economies have been pushing ahead, with some already implementing the rules. 

In June 2020, South Korea’s Financial Services Commission (FSC) approved the adoption of the rules by 15 of the country’s 19 domestic licensed banks and all eight banking holding companies. The remaining banks – Standard Chartered Bank Korea, Citibank Korea, KakaoBank and K Bank – will implement the credit risk framework by the original deadline of January 2023. The FSC estimated at the time that the move would raise the BIS capital ratio by an average 1.91 percentage points for the 15 banks, and 1.11 percentage points for the eight bank holding companies. The timing of this move helped the country’s banks to continue to perform well throughout the pandemic. 

Others have given their banks a small window to overcome macroeconomic impacts. In June 2021, the Hong Kong Monetary Authority (HKMA) announced it would implement revised frameworks on credit risk, operational risk, the output floor and leverage ratio, which will now be implemented from July 1, 2023 – six months later than originally scheduled. Further, the implementation of the revised market and credit valuation adjustment risk frameworks was also pushed back by six months to January 1, 2024. 

Adapting to these rules is seen as giving Hong Kong’s banks an advantage in the region. A HKMA spokesperson says: “Implementation of the standards in Hong Kong will further enhance the soundness and resilience of the local banks and banking system. This should give local banks a competitive edge over their peers in jurisdictions that are yet to implement the standards, for instance, in terms of market confidence, authorised institutions are able to garner through the adoption of more risk-sensitive frameworks for calibrating capital requirements. Having said that, the HKMA does not expect the implementation time gaps among jurisdictions to differ too widely.” 

In emerging markets, however, there remains a long process to reach the required standards. Vietnam, for example, has banks which are still only reaching the Basel II standard. In a note published by Fitch in March 2022, it outlines how the banks that are not yet Basel II compliant will need to raise $600m in new capital ahead of the January 2023 deadline. “The average capital adequacy ratio of Basel II compliant state-owned and private-sector banks stood at 9.2% and 11.4%, respectively, at end-third quarter 2021. This was much lower than the weighted-average of 19.4% for banks in other major south-east Asian markets,” said Fitch.

if international banks delay implementation, the rest of the community will too

Diana Parusheva

The need to raise capital is seen in other jurisdictions, with several Indian banks outlining plans to issue bonds. RBL Bank raised $100m from issuing Basel III-compliant unsecured and subordinated Tier 2 bonds during May 2022. The bond issuance raised the bank’s capital adequacy ratio to 17.85%. Ministry of Finance-owned Canara Bank announced in July 2022 it had raised Rs20bn ($250m) of Tier 1 capital, while State Bank of India has announced plans to raise Rs70bn of additional Tier 1 capital and Rs40bn of Tier 2 capital through bond issuances in the 2023 financial year. 

Diana Parusheva, executive director, head of public policy and sustainable finance at the Asia Securities Industry and Financial Markets Association, says these differences in implementation schedules are likely to cause issues. “Instead of facilitating smooth operations in the financial sector, it will create certain obstacles adding complexity and cost,” she says. “Those who had been leading the process are slowing down in implementation, which is having an impact across the sector.” 

She adds that the larger banks have a responsibility to implement the rules across jurisdictions. “For local banks, implementing Basel III standards is an opportunity to be accepted within the international community and be able to tap into the capital flows of international banks and funds. International banks are being looked at as the frontrunners, and if they delay implementation, the rest of the community will too,” Ms Parusheva says. 

Approaching the deadline 

Along with the countries that are postponing implementation and those that are still raising capital to meet the requirements, there are others who are still working towards a January 1, 2023 implementation date, such as Australia. 

The Australian Prudential Regulation Authority (Apra) first put the expectations on capital levels in place during 2017, which Robert Street, senior policy manager at Apra, says has given the banks a long lead time to build up to where they need to be. He explains that while there were some initial periods of capital building, it was a reasonably benign market period. Any need to raise capital since has been managed through dividends and profit management. 

The larger banks have stricter rules to follow, but the regulator is confident they can be met. Anthony Coleman, head of credit risk analytics at Apra, says: “The six internal-ratings-based (IRB) banks have an additional 1.25% capital buffer and have to do the standardised calculations in addition to the modelled calculations — but outside of that, the timelines on implementation remain the same.” 

As the deadline approaches, the focus is less on raising capital than helping the banks to implement the complex rules. Gideon Holland, general policy manager at Apra, says: “Part of the complication for the big banks is that they now have to do calculations both using their internal models and using a standardised basis. That’s a really important part of the Basel reforms and was put into our framework to maintain a level of consistency. This is also important from a competition perspective.” 

“A lot of the reforms are not necessarily about changing the level of capital the banks need to hold; it’s around the implementation of the specific details and embedding those expectations into the framework,” Mr Street adds. He says that Apra is willing to be pragmatic with the industry on the implementation of the rules, and the regulator is working with some banks on an individual basis at the present time to assist with meeting the requirements. 

China’s extra rules 

In China, the approach has been to actively prepare the banks for shocks worse than those anticipated by Basel III. 

The rules are being applied based on the size and the status of the bank. The country’s six biggest banks – the big four of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank, along with Bank of Communications and China Merchants Bank – are considered the most technically competent and are using the IRB approach. This allows the banks to model their own probability of default, and the regulator gives them a loss given default parameter of 45% for unsecured senior debt and equivalent class of liability. 

The country’s other commercial banks are using the standardised approach to risk-weighted assets, while the smaller, rural institutions (such as village banks or rural credit co-operatives) are considered as a separate class of bank (and so the Basel rules are not required).

Still, China has moved beyond the Basel III outline, imposing rules for banks holding over Rmb200bn ($29.53bn) in assets. The liquidity coverage ratio (LCR) was implemented for these banks in March 2014, and since July 2018 they have been subject to stable funding ratio requirements. Further rules were introduced in January 2020, with the implemented liquidity matching ratio (LMR) regulation. 

Nicholas Zhu, vice-president and senior credit officer at Moody’s Investors Service, says: “The Chinese definition of the LMR is to prevent the mismatching of assets and liabilities. If a bank raises the short-term liability debt to fund its long-term investment in structured credit, that is feasible within the LCR framework, even though the bank would likely need to take some haircuts.

“The LMR would try to stop that. The regulator is cutting down on the level of shadow banking activity, with the LMR getting a handle on the mismatching of assets and liability.” 

Mr Zhu says the LMR comes from the long-term focus on liquidity management. “It is a very important defence against the credit culture and the structural issues that come from shadow banking, and helps to manage against systemic risk eruption,” he adds.

I see a two-track system where larger banks are subject to more technically demanding regulatory ratios

Nicholas Zhu

The regulator expects to see more banks move into the higher categories over time as they become more technically sophisticated, Mr Zhu believes, with bank boards under scrutiny. 

“I see a two-track system where larger banks are subject to more technically demanding regulatory ratios, with the middle part moving towards the more technically demanding parts,” he says. “The rural financial institutions would stay on less technically demanding versions of the regulations and focus on governance, and getting the risk appetite right to fit their local businesses.” 

Ultimately, Mr Zhu says the implementation of the rules is about maintaining accountability across the banking sector. “Even with the differentiated approach for the commercial and non-commercial banks, the requirement of the board of the bank to be responsible for the implementation is consistent,” he says.

“The focus is on holding the board responsible for implementing the rules that will help with risk management. The regulator does not promote the idea that mere technical competence equals risk management.” 


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