Monday, September 13, 2010

Basel III eases Asia bank capital raising fears

SINGAPORE: New bank capital requirements agreed by global regulators brought relief to Asia's financial sector on Monday, Sept 13 as fears that lenders might be forced into fresh capital raising were put to rest.

The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7 percent of their risk-bearing assets.

This is a substantial increase from the current requirement of 2 percent, but is significantly lower than what banks had feared earlier this year and comes with a phase-in period extending in some cases to January 2019 or later.

"It's no big bang for banks, not with a phase-in arrangement of five years," said Commonwealth Securities analyst Craig James. Japan's largest banks, which have some of the lowest levels of capital in Asia, rallied on the news. Mizuho Financial Group rose as much as 2 percent and Mitsubishi UFJ Financial Group increased as much as 3.0 percent.

Analysts at Macquarie estimate that Japanese banks have on average a common equity ratio of 6.3 percent, just shy of the 7 percent requirement.

However, banks will not be required to meet the minimum core tier one capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets, until 2015. An additional 2.5 percent "capital conservation buffer" will not need to be in place until 2019.

"I don't think any Japanese banks now have to raise capital on the back of this, barring any sizeable acquisitions," said Ismael Pili, Macquarie's head of Asian financials research.

An official from Japan's regulator, the Financial Services Agency (FSA), said Japan's top banks can meet the new capital requirements "within their usual business efforts," adding he did not think the banks would be forced to raise fresh capital or drastically reduce their assets.

CHINA IMPLEMENTATION

For China, it may take some time before the new measures hit the rule books, one of the country's top bankers said.

"It will take a long time to implement Basel III rules," Bank of China Chairman Xiao Gang told Reuters on the sidelines of the World Economic Forum's summer meeting in Tianjin, China.

"It's also difficult to say when China will implement this rule because we haven't exercised Basel II yet," he said.

However, Zhu Min, deputy governor of the country's central bank, signalled he is keen for the rules to be adopted in a co-ordinated manner.

"The concern is that if everybody in the world applies different levels at the same time, it may cause international arbitrage in the regulatory framework," he told reporters in Tianjin.

SURPLUS CAPITAL

Most banks in the rest of Asia have capital levels well above the minimum levels under Basel III. That presents some banks with an opportunity for further growth by releasing some of their surplus capital, some analysts said.

"From here in Asia, the trick is to find the well-capitalised banks and match them with markets ripe for a further expansion in lending," said Macquarie's Pili, adding Indonesian banks have the most to benefit from the new requirements.

But with Asia leading the global economic recovery, the region's banks are likely to be the first in the world to have to meet the additional counter-cyclical capital buffer of 0 to 2.5 percent, which national regulators will apply during periods of excess credit growth.

"My take for non-Japan Asia, you are still looking over the course of the next 10 years at significantly more capital in the system," said Bill Stacey, head of equities at Keefe, Bruyette Woods Asia in Hong Kong.

He added that if regulators in Asia make full use of the counter-cyclical buffer, some banks may face a total capital requirement of 13 percent - the 10.5 percent tier one and tier two requirement plus the buffer on top.

For Europe, the pain is likely to be more immediate. Top German lender Deutsche Bank is seeking a headstart on its rivals by announcing plans to raise almost 10 billion euros to bolster its capital.

Other banks in Germany, Spain, France, and elsewhere are likely to follow suit to meet the new standards.

But the long run-up period that banks have to meet the requirements is likely to make the process easier for Europe's financial sector. The euro rallied almost 1.0 percent against the dollar in Asian trade to hit $1.2808.

This implementation period raised questions, though, about whether heavy lobbying and the global economic recovery reduced regulators' resolve for harsher measures following the deepest financial crisis in decades.

"The phasing-in period for the new capital requirements is surprisingly long, which will add to the scepticism about the robustness of the bank capital enhancement efforts," said Mohamed El-Erian, co-chief investment officer at Pimco, the world's biggest bond management company.

The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.

Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks' assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.

Leaders of the Group of 20 rich countries and big emerging economies, blaming the global credit crisis partly on risky trading by banks, called on regulators in 2009 to work on tougher bank capital rules.

The G20 leaders are set to endorse Sunday's deal when they meet in Seoul in November. - Reuters

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