An annual survey by the UK-based
think tank the Centre for the Study of Financial Innovation,
sponsored by consultants PricewaterhouseCoopers, reports bankers in
Asia-Pacific believe too much regulation and macro-economic trends
are the biggest threats to the financial services industry today.
Elena Torrijos
reports.
Bankers in Asia-Pacific are very
concerned that over-regulation could lead to stifled recovery and
unintended consequences such as more costly systems or
unsustainable business models, according to the 13th Banking Banana
Skins 2010 survey.
Go deeper with GlobalData
The report, conducted by the UK-based Centre
for the Study of Financial Innovation (CSFI) in association with
consultants PricewaterhouseCoopers (PwC), was notable for the
strength of concern about regulatory over-reaction to the crisis,
particularly in Australia.
It also noted pessimism about the economic
outlook, mainly because of fears of a ‘bubble’ in the tiger
economies and a collapse of the credit markets. The region also
focused on the risks of fraud and the banking system’s high
technological dependence.
The report noted the following top 10
concerns:
1. Too much regulation
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By GlobalData2. Macro-economic trends
3. Political interference
4. Credit risk
5. Commodities
6. Equities
7. High dependence on technology
8. Currencies
9. Liquidity
10. Derivatives
Chris Matten, PwC partner told RBI that
bankers in Asia-Pacific are wondering why they should be victims of
a global backlash on regulation, given that they have been running
conservative balance sheets at their institutions and did not
commit many of the costly errors that contributed to the financial
crisis.
Late last year, the Basel club of bank
supervisors proposed a raft of regulations to better protect the
financial services industry from another crisis.
Specifically, the proposals seek to impose
stricter rules on eligibility of instruments to be included in core
Tier 1 capital, including to strengthen counterparty credit risk
capital requirements arising from derivatives, repurchase
transactions and securities financing and require compliance with a
non-risk-based leverage ratio.
In addition, they called for forward-looking
provisioning and capital buffers and developing a global liquidity
standard comprising a stressed liquidity coverage ratio and
longer-term structural liquidity ratio.
“The Asian banks are pretty well capitalised,
but to a certain extent that is because they choose to be,” Matten
said.“In other words, they choose to keep quite a conservative
margin over and above the regulatory minimum. If the regulatory
minimum moved up to a level where it is still at or below where
they are capitalised, they may want to keep that degree of
conservatism so they may have to increase their capital ratios
further.”
He added that this description generally
applied to banks in the region except Japan.
“I must point out the Japanese banks are not
particularly well capitalised,” he said. “The Japanese banks are
moving to adopt International Financial Reporting Standards (IFRS)
and that will deplete their capital ratios further. When you take
into account they are already quite thinly capitalised even on
[Japanese accounting regulations] you can imagine what a
combination of IFRS and new Basel rules will have on Japan.”
Follow regulation
discussions
Matten would advise bankers to
carefully follow discussions on regulations and get views across to
local regulators so the latter can take these views to the Basel
Committee.
“You have to remember the availability of
credit in an economy is simply the amount of capital in the banking
system times the amount of leverage the banks are allowed to take,”
he said. “If you reduce the amount of leverage or you constrain the
amount of capital in the system you’re going to constrain credit,
and that has negative economic consequences.”
Gary Dingley, chief operational risk officer
at Commonwealth Bank of Australia, expressed concern about the risk
of a regulatory overreaction “without the necessary review,
consultation and analysis of overall impact on the individual banks
or the financial sectors”.
Macro-economic trends emerged as the second
top risk for the region because the region’s senior bankers feared
a correction in both equity and credit markets, and that the hubris
of recovery in Asia could inadvertently pave the way for an asset
bubble, which would eventually burst with damaging consequences, as
it did in 2007.
The chief executive of a Far Eastern bank said
liquidity is “being poured mostly into ‘financial assets’ such as
equities and real estate, thus creating a bubble economy. More
needs to be done to boost credits and investment flows into
productive industries”.
Elbert Pattijn, chief risk officer at DBS Bank
in Singapore, saw the main risks as “double dip in terms of global
GDP, leading to high inflation and interest rates that would impact
property values and the ability of property owners to service their
floating rate loans”.
Matten says he generally agrees with the top
major risk factors cited by the Asian respondents, but that what
personally worried him most is liquidity.
“We are seeing a strong drive by regulators
around the world to ring fence liquidity in the national
economies,” he said.
“Now, from each individual national economy’s
point of view that makes sense. But if you take a step back and
look at if everybody does that, then it doesn’t make sense, because
what it means is that the surplus liquidity generated by the high
savings rate in Asia becomes trapped.”
A high dependence on technology also ranked
especially high on the list of risks cited among bankers in
Asia-Pacific at seventh place. Matten said the ranking of too much
reliance on technology in the region is a little bit of a mystery
to him, and he speculates it could be because Asian banks have not
invested enough in it and are therefore concerned about the need to
spend on it.
Consultant Steve Dyson said: “The sector needs
to invest a huge amount in new technology to keep pace with the
monitoring and management of risk. This, allied with the need to
invest in upgrading/replacing legacy systems, will place a huge
burden on budgets over the next two to three years.”
Respondents also made the point that risk not
only lies with the systems but in managing – and retaining – the
people who run them and understand them.
