Basel III Capital Requirements in ASEAN and India Generally More Stringent Than Basel Recommendations

Moody's Investors Service says that regulators across key ASEAN countries and India have made quick progress on implementing the Basel III capital framework, and the banks in the region will ultimately maintain higher amounts and better quality capital than many of their peers globally.


"However, significant differences exist in the specific rules across the jurisdictions, and these are important to understand when assessing and comparing banking systems and individual banks," says Jean-Francois Tremblay, Associate Managing Director for the region.


Tremblay was speaking on the release of a comparative analysis of the key features of the Basel III frameworks implemented across the South and Southeast Asian banking systems entitled "Review of Basel III Implementation in ASEAN and India".


Basel III, developed and monitored by the Basel Committee on Banking Supervision (BCBS), requires banks to maintain more and higher-quality capital, while also constraining excessive leverage and maintaining minimum liquidity standards. The measures are aimed at improving the sector's ability to absorb shocks arising from financial and economic stress, whatever the source.


In terms of capitalization, most ASEAN banks are well positioned to meet the new Basel III capital requirements. However, Indian banks -- mainly public sector banks -- carry a lower capitalization level than others currently and some may be challenged to meet the new requirements.


Moody's report highlights that the key differences that exist among individual banking systems generally relate to the gradually increasing quantitative capital thresholds that the banks will need to meet over time, as well as the number and extent of deductions that will apply against capital calculations, which aim at improving the quality of capital.


Among other such differences, Moody's mentions that the common equity Tier 1 (CET1) capital ratio required from banks in the region will vary from 4.5% to 6.5% by the time the frameworks are fully implemented, with the Philippines and Singapore at the higher and more stringent end of the spectrum, and Indonesia, Malaysia and Thailand at the lower end of the range -- although more in line with the BCBS guidelines.


The rating agency also highlights that some jurisdictions in the region are more strict than others with respect to what is included in CET1, such as in Malaysia and Singapore, where unrealized gains do not get fully accounted for in CET1.


The Moody's report also reviews the new securities that qualify as capital under Basel III, and which must have explicit terms that impose losses on investors either at the point of non-viability (PONV) as determined by the regulator, or when specific triggers are breached.


Recent months have seen a pickup of these PONV securities and to date, about $6 billion in these Basel III-compliant instruments has been issued by Moody's-rated banks in the region, though mainly in the banks' domestic markets.


"Our 60 rated banks in ASEAN and India currently have about $44 billion of "old-style" capital securities that will become callable or mature between March 2014 and end-2017, both in local and foreign currency. We expect banks in the region to replace a material amount of "old-style" securities that do not have such loss-absorption features with new Basel III compliant securities," says Tremblay.


Other elements of the banking regulatory framework that the Moody's report covers are the leverage and liquidity ratios, which remain largely undefined; as well as bank resolution regimes, which have not evolved in the same way as in Europe or North America. Moody's expect regulators in the region to start shifting their focus to minimum liquidity standards in 2014.


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