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Asian Banker Research Proceedings Report March 30th , 2011 “How will Basel III impact your Basel II-compliant risk management plan?” The proceedings of the teleconsultation session with leading risk practitioners to determine the impact of the new global rules on bank capital and liquidity (Basel III) on Asian banks I. Background The following is the proceedings report of the teleconsultation session of senior bankers held on March 30 th 2011 to discuss the impact of the new global rules by the Basel Committee and the Group of 20 nations on bank capita and liquidity on banks in Asia. The session was attended by a panel comprising Elbert Pattijn, chief risk officer, DBS Bank, Singapore, Tsuyoshi Oyama, former deputy director-general, financial system and bank examination department, Bank of Japan and partner, financial industries group at Deloitte Touche Tohmatsu, Japan, and Austin Trippensee, senior industry solutions specialist, Oracle Financial Services Software and moderated by Arush Chopra, senior analyst, The Asian Banker, Singapore. The teleconsultation session discussed the driving forces, key concerns and challenges relating to Basel III that the Asian Pacific region’s leading banks are concerned with today. II. Proceedings Location and Date Date of meeting: March 30th 2010 Format: Teleconsultation session III. In Attendance The session was attended by the following 68 senior executives: Sal Ms Mr Mr Ms Mr Mr Mr Mr Mr Full Name Helen Jang Benjamin Frank Martin Davies Margie Pagdanganan Suchir Swarup Hong Li Lawrence Koh Choo Koon San Perumal Ramanathan Title Senior Risk Manager EVP, Wholesale Credit Risk Risk Consulting, Banking Markets Bank GE Capital HDFC Bank Casual Capital Director, Audit & Risk Review AVP, Market Risk Management Director, Risk & Decision Management Risk Management, Global Consumer Group VP & Head Asset Liability Management Citibank OCBC Bank American Express Citibank Singapore Limited OCBC Bank Executive Director Market Risk Pros ________________________________________________________________________ Retail Banking Benchmarking Competitive Working Session Page 1 of 5 Asian Banker Research Proceedings Report Ms Mr Mr Winnie Ng Makoto Hamada Sam Fox Mr Wirot Tantiapikun Ms Ms Ploi Notklao Thipvadee Sindhuseka Mr Mr Mr Mr Mr Rohit Suradkar Bart Piron Ayuth Krishnamara N. C. Raghava Abhijit Sinharoy Mr Wong Sing Foo Mr Mr Ms Mr Mr Mr Ms Woon Chee Keong Jeffrey Chua Chio Su Lan Nandha Kumar Subramaniam Wong Yee Fun Lim Hao Jyh Ee Seet Ching Mr Mr Lok Kok Wah Ulrich Schanz Ms Ms Liu Na Khaliza Adillah Binti Khalid Mr Mr Mr Mr Mr Ms Ms Mr Fakhri Sarjan Sukanto Ghoshal Lana Awad Kunal Chowdhry Khoo Teng Cheong Sandy Tan Chlore Tang Roslan Ahmad Ms Ms Ms Hooi Hooi Lai Fong Nor Azlin Ahmad Anisha Sa’ afi Mohd Fauzi Mohd Noor Roslina Abdul Malik Suzilla Mohd Ratha Wong Fook Chun Fakhrul Azman Mr Ms Ms Mr Mr Analyst Senior Sales Manager, Enterprise Accounts Senior Consultant FVP, Integrated Risk Management and Analytics Department Assistant Unit Manager, Integrated Risk Management and Analytics Department Unit Manager, Integrated Risk Management and Analytics Department Maybank SAS Institute Pte Ltd Sheffield Haworth (Asia) Pte Ltd Vice President, Market & Liquidity Risk Principal Consultant EVP, Risk Manangement Global Risk Trainer Head, Enterprise Risk Management Assistant Manager, Risk Portfolio Management / Credit Risk Dashboard BNP Paribas Algorithmics Singapore Bangkok Bank Standard Chartered Bank Visa International Head pillar 2 basel II Head pillar 3 basel II Head ICAAP Pillar 2 Basel II Maybank Maybank Maybank Head, Model Validation Head, Corporate Finance & Capital Management AVP, Corporate Finance & Capital Management AVP, Corporate Finance & Capital Management Principal Consultant, Risk Management/Market Risk Functional Architect Consumer Portfolio Analytics & Reporting, Consumer Credit Risk Maybank Maybank Maybank Maybank Head, Financial Analytics & Risk Management Head Portfolio Management, PBC - Global Credit Products Lead Analyst Managing Consultant, Finance & Risk VP, Group Planning Managing Director VP AVP Financial Control Sector & Franchise Network Performance Management Distribution Financial Analytics Business Financial Analytics Maybank Financial Planning Management Reporting Performance Management Risk Management Risk Strategy & Governance Maybank Maybank Maybank Maybank Maybank Kasikornbank Kasikornbank Kasikornbank OCBC Bank Murex South East Asia Pte Ltd Thomson Reuters OCBC Bank Deutsche Bank GE Capital IBM DBS DBS DBS DBS Maybank Maybank Maybank Maybank ________________________________________________________________________ Retail Banking Benchmarking Competitive Working Session Page 2 of 5 Asian Banker Research Proceedings Report Ms Bujang Mohd Faizul Alias Innayati Izah Mostaman Abdul Hamid Shamsuddin Siti Zairunisya Mohd Rasim Ms Wong Yi Ting Mr Mr Kum Sook Chin Ahmad Firdauz Ab Rani Mr Mr Ng Foong Yee Sanjay Jagtap Ms Mai Tuan Viet Mr Ms Rahul Sharma Renuka Singhal Mr Oh Yann Kai Thiphakone Paphassarang Patrick Tinez Mr Ms Mr Mr Mr IV. Credit Risk Maybank Risk Policy & Review Maybank Risk Assessment & Mitigation Maybank Risk Analytics & Portfolio Management Executive, Risk Analytics & Portfolio Management Executive, Risk Analytics & Portfolio Management Maybank Executive, Credit Risk Executive, Risk Analytics & Portfolio Management Director Maybank Associate, Corporate Banking Credit Risk Technology Functional Analyst, Operations & Reporting for Capital & Liquidity - Basel II Basel II Assurance Manager Maybank Maybank Maybank Abhirutu Consultants DBS Bank Market Risk, Asia ex-Japan Barclays Shared Services Pvt. Ltd. Barclays Shared Services Pvt. Ltd. Nomura International (Hong Kong) Limited Head of Risk Management Solution Deputy Director, Risk Unit Murex SEA Pte Ltd Credit Agricole Key Discussion Points The following were the issues identified by the attendees: 1. 2. 3. 4. 5. 6. Macro issues on Basel III Impact of Basel III on Asian banks Concerns with Credit Value Adjustment (CVA) Regulatory distortions Concerns with central clearing Effects on risk assessment via economic capital 1. Macro issues on Basel III Asian banks are better capitalised and more liquid than their western counterparts. Capital has already been raised by many banks, but more is expected; this, in turn, will lower ROE and make banks unattractive for investors. Banks may try to lay off assets to the shadow banking sector. Even if the above does not happen, banks will have to shed assets to shrink their balance sheets, reduce the scale of operations and economic growth will suffer. Liquidity is a bigger concern than capital owing to the sheer size of the debt banks will need to meet liquidity regulatory obligations. ________________________________________________________________________ Retail Banking Benchmarking Competitive Working Session Page 3 of 5 Asian Banker Research Proceedings Report 2. Impact of Basel III on Asian banks 3. Basel III discriminates against banks holding other bank’s bonds, while EU directive Solvency II does the same for insurers. As a result, large institutional investors will find it unattractive to hold those bonds, raising questions about who will hold them. Basel III may heighten counterparty risk due to currency mismatch as the currency of the deposit base is mostly the local currency of the bank whereas a substantial part of the lending is in a different currency. Banks need to run a sizeable swaps book to hedge the mismatch between the currency of deposit and the currency of loans; but running a swaps book brings forth its own liquidity issues, making the bank vulnerable to counterparty risk. Banks are supposed to hold a large quantity of liquid bonds, mostly sovereign issues, of which there is an insufficient volume in most Asian markets. Asian banks will need to recalibrate the macro-risks they face and be creative enough to assume tail risks in macro-stress scenarios in a Basel III world. They might also face intensified competition with western and Japanese banks, which are motivated by Basel III to boost their profitability in conventional banking in Asia. There is a need to re-align risk management with regulators’ expectations that emphasise less risk allowance and establish a more top-down, group-wide risk management approach. Banks need to support financial innovation, including various trading and securitisation businesses, to address risk concentration in the banking sector but still satisfy the diverse needs of the corporate sector. Concerns with Credit Value Adjustment (CVA) 4. The level of capital required for CVA has almost doubled,although the impact of this measure will be felt more for western banks with large swaps books. Very limited recognition of credit hedges. No recognition of IR/FX/EQ elements of CVA charge. Regulatory distortions Discrimination against holding bank bonds. Sovereign bonds favoured. In the absence of relevant bonds allowed for meeting liquidity requirements, banks will have to resort to funding lines from central banks. This leaves the question open if regulators will be able and willing to provide it given the cost involved in doing so. If some regulators do so while the others do not, it will create regulatory distortions in the region. 5. Concerns with central clearing Trading via central counterparties (CCP) is favoured from a regulatory capital point of view. CCP clearing amounts to outsourcing of risk management by banks to a third party. ________________________________________________________________________ Retail Banking Benchmarking Competitive Working Session Page 4 of 5 Asian Banker Research Proceedings Report Banks will have no control over what counterparties they are dealing with as CCPs, for competitive reasons, may lower standards and deal with counterparties that a bank wouldn’t normally deal with, creating risks. 6. Effects on risk assessment via economic capital Net result of Basel III could be that Pillar 1 will always be more important than Pillar 2. Banks will be tempted to merely manage regulatory capital. The role of economic capital will be weakened. For a full review of the presentation and further insights into benchmarking risk management, please visit www.riskandregulation.theasianbanker.com This Asian Banker teleconsultation session was supported by Oracle Financial Services Software. ________________________________________________________________________ Retail Banking Benchmarking Competitive Working Session Page 5 of 5