Double standards on Basel II?

IMF sits on the fence on developing countries adopting Basel II.

“We will not criticise any emerging market that chooses not to adopt Basel II,” Jonathan Fiechter, IMF deputy director in charge of monetary and financial systems, said in response to a question from the audience at one of the pre-conference sessions of The Asian Banker Summit 2004 in Hong Kong today.

Fiechter, who was part of the Basel Committee, concedes that the agreement is more suited to developed countries’ banking habits and social structures, than those of developing countries, and thereby not fully international. “I am really sorry that that the Basel committee, for obvious practical reasons, has so few countries participating, because everyone – the US, the EU – learned a lot from the process of working through Basel II.”

He added: “I don’t want to suggest at all that the bank or the fund does not support the objectives, the concepts behind Basel II. (But) Basel II, I think, does assume an infrastructure is in place, including rating agencies, for the standardised approach,” Fiechter noted. “If you don’t have (rating) agencies or you don’t make loans to borrowers subject to public ratings then the standardised approach…holds out the prospect of a higher capital charge than you have today.”

“In the US,” explains Fiechter, “most institutions are going to stay on Basel I for the foreseeable future. Most banks, most thrifts, will not adopt Basel II.”

In the session on capital management after Basel II, Dr Michael Ong, who has been head of risk at three key global banks and today a professor of finance at the Illinois Institute of Technology, went straight to the heart of the matter when he asked: “Why do banks need capital, and how much is enough?”

HKMA’s Simon Topping responded emphatically that he was not convinced by any claims, at this point, that one could precisely provide an assessment of what level of capital charge banks should hold. He took the view that “Basel II is about doing real assessment of where your risks are. To us, interest rate risk is the most important area for us and what we want to assess first.”

The following discussion posited that Basel II is not wholly about capital requirements. Whether viewed as a form of taxation, deadweight cost, or as just one part of the new Basel framework, discussants, including David Belmont of Nexgen Holdings and Otbert de Jong of ABN AMRO, agreed that capital management serve one singular important purpose - to provide a buffer against risk.

This, in fact, was Basel I’s original intention. More importantly, banks still have a business to run. “With higher levels of capital,” said Ong, “banks require a higher level of targeted returns.” After all, “capital without returns has no meaning.”

But if that is the case, why should Asian banks adopt Basel II? Ultimately, Topping pointed out that Basel II is about banks developing “skills that allow them to lend more, at better rates, hedging technology and offering more sophisticated products”.

Fielding another question from the floor on the role of capital in China, Ong declared that “what should happen is that banks should have enough loan loss reserve set aside to sustain (themselves). This has nothing to do with capital charge nor from Basel II but common sense.”

Over at the annual technology forum at the Summit, one of the consensuses that emerged was that the industry was making concrete paradigm shifts from a mindset and mode of disaster recovery to that of business continuity. It is only a matter of time that the higher benchmarks imposed in this respect by global banks filter down to the local banks.

A key to successful IT implementations in this, said Chia Tek Yew, HP’s vice president and general manger for consulting and integration for Asia Pacific, is for banks to develop a new competency in partnering with technology suppliers. He added: “The faster that both sides learn to work together, rather than as customer-vendor, the higher the chances for success."

While technology is being seen as a pivotal enabler for banks to become more customer-centric, the challenge really for CIOs is to justify investments, especially in expensive core banking systems. Greater business agility is being seen by CIOs as a key business case for banks to justify investments in core banking.