While most banking regulators in Asia Pacific are implementing key aspects of the regulatory reform agenda, such as on capital and liquidity, Hong Kong stands out as setting the pace in a number of areas, including:
- Liquidity – introduction of the “stable funding requirement”
- Recovery and resolution planning – proposing to apply widely (to all authorised institutions), and legislating on resolution approach/powers
- Customer treatment – launch of “Treat Customers Fairly” Charter
- Prudent use of internal models – introduction of minimum risk weight for residential mortgages and “floor” for risk-weighted assets.
“It is quite noticeable that Hong Kong is pulling ahead of much of the rest of the region in terms of introduction of some of these latest regulatory initiatives," says Simon Topping, Partner and Head of KPMG’s Asia Pacific regulatory team. "This may be being done for good reasons, but Hong Kong needs to ensure it isn’t too much tougher than other jurisdictions, or there could be an effect on business and on customers.”
The report identifies five areas where regulation, combined with other pressures, is forcing banks to make changes, these being structure, conduct, markets and culture, data and reporting, risk governance, and OTC derivative reform.
Topping adds: “In addition to looking at each of these areas separately, you also have to consider the cumulative effect. Regulation is driving changes in bank behaviour, structure, and business and operating models that impose substantial costs both on the banks themselves and on their customers. It’s important to get the balance right.”
Aware of the knock-on effect that problems in banks in the West had on Asian markets during the Global Financial Crisis, the report notes that regulators in Asia Pacific are taking a number of steps to try and insulate their markets from any future problems involving the global systemically-important banks.
These include requiring subsidiarisation of their local operations, the preparation of local recovery and resolution plans, and reducing reliance on group support in areas such as funding and risk management.
“Regulators in Asia Pacific are in a difficult position,” explains Topping. “On the one hand, they recognise the benefit the big global banks bring to their local market, and their importance to the global economy and particularly to international trade. On the other hand, after the Global Financial Crisis, they are all too aware of the potential risks to their local market if one of these big banks ever gets into trouble again.”
The European edition of the report finds that the volume of regulation is such that the ‘tipping point’ - where the costs of increased regulation exceed the benefits - had already been passed.
However, this is not yet the case in Asia Pacific.
“At the moment, in Asia Pacific, the benefits of all this new regulation, in terms of enhanced financial stability and the greater confidence in the financial system it engenders, outweigh the costs, in terms of reduced profitability for the banking industry and perhaps increased cost and reduced choice for customers,” concludes Topping. “Care needs to be taken, however, to ensure that we don’t overdo it and get to the point where the costs outweigh the benefits – which is what has maybe already happened in Europe.”