Banks across Asia face a tough 2012, with ongoing concerns about liquidity and key regulatory reforms due to be implemented, according to KPMG's new report, Evolving Banking Regulation.
The report contrasts regulatory developments in Europe, the US and Asia Pacific. Despite the intention of the G20 to have regulatory convergence, the intensity and urgency of policy initiatives coming out of various jurisdictions is directly correlated to local market conditions.
It also highlights the challenges being faced in balancing the need for regulatory reform and financial stability against potential negative effects on the economy. While banks in Asia generally fared very well during the Global Financial Crisis, most of the key regulators in the Asia Pacific region are pushing ahead with implementing the package of regulatory reforms agreed at the international level.
While reform in the area of capital is non-problematic for most of Asia, the Basel III reforms in the areas of liquidity pose a much greater challenge, and a number of Asian jurisdictions face fundamental issues, particularly in relation to shortage of high quality liquid assets for banks to hold as liquidity.
But not all of the challenges relate to Basel III; banks in the Asia Pacific region also have to prepare, among other things, for planned OTC derivatives reforms, implementation of FATCA, and issues in individual local markets.
"Banks in the region face a daunting task in meeting regulators' expectations in a bewildering number of areas" says Simon Topping, Head of KPMG's Financial Services Regulatory Centre of Excellence for the Asia Pacific region, based in Hong Kong. "The feeling among many is that this is overkill, given how well banks in the Asia Pacific region fared in the Global Financial Crisis, but the current disturbing situation on European sovereign debt, and continuing concerns about financial in stability, say regulators, indicate that the global regulatory reform agenda needs to continue apace".
There are concerns, however, that the cumulative effect of all this regulatory change could have a negative effect on the economy. Topping explains: "While there's little doubt that the current raft of regulatory change including Basel III will be "a good thing" in terms of making the global financial system safer and more stable, it's important to balance this against the potential dampening impact of these measures on global growth. We have already heard suggestions that the Chinese authorities are looking at holding off a little on implementation for fears of the potential effect on the economy if tighter capital and liquidity requirements lead to higher borrowing costs and lower lending capability."
The report highlights the substantial challenges being faced by the banking industry, not least increasing credit risk, threatening the supply of funding and limiting opportunities for growth. In addition, there has been reduced bond and equity issuance, and subdued M&A activity.
Meanwhile in Hong Kong, the HKMA is taking a measured approach, and their proposals on the key areas of capital, liquidity, and OTC derivatives reform are emerging.
Topping concludes: "If there's a concern in the market it's perhaps that they would like to see more tailoring to the particular circumstances of Hong Kong, particularly on the liquidity side. We are also starting to hear some concerns voiced regarding effects on the cost and availability of credit. But, overall, Basel III and the associated regulatory changes is something Hong Kong can deal with without too much problem. There's ever-increasing interest in doing business in Hong Kong, and being regarded as a highly reputable centre that adheres to international regulatory standards plays an important role in this."
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