Sat, Jan 22, 2005 - Page 11 News List

Banks prepare for new risk assessment system

UPGRADING A new risk management system enacted by lending organizations across Asia next year is expected to make credit allocation more efficient

By Joyce Huang  /  STAFF REPORTER

As Asian banks gear up to implement Basel II in late 2006, clients in the region's retail banking businesses can expect differentiated services and pricing in accordance with their credit history, local bankers said.

"Under the new capital scheme, clients with better credit will be indirectly rewarded with better pricing," said Joy Tang (湯碧秋), general manager of the cash card department with Union Bank of Taiwan (聯邦銀行).

Basel II is an effort by international banking supervisors to update the original international bank capital accord (Basel I), which was developed by the Basel Committee on Banking Supervision and has been in effect since 1988.

This new capital framework is aimed at improving the consistency of capital regulations internationally, making regulatory capital more risk sensitive, and promoting enhanced risk-management practices among large, internationally active banking organizations.

According to international rating agency Fitch Ratings, the Basel II framework could potentially affect some lending markets in Asia.

Retail lending, for instance, could become even more attractive as Basel II generally provides lower charges on residential mortgage and credit card lending relative to Basel I, which may accelerate the existing shift of Asian banks toward retail banking, Fitch said in a report earlier this week.

Such shift, therefore, is expected to intensify price competition in the retail businesses to indirectly benefit consumers, Tang said, although another banker at Fubon Financial Holding Co (富邦金控) said that such stiff price competition is not imminent, depending on the local banking sector's progress in adopting Basel II.

Citing Basel II's long-term benefits for Asian banks, a Fitch Ratings official said, "over time, Basel II will serve as an important catalyst for Asian banks to develop more sophisticated risk management and more efficient credit allocation practices."

Once a sophisticated risk management mechanism is developed, bank clients will also benefit from differentiated services, in addition to differentiated pricing, said Walter Lin (林文彬), head of risk management division at SinoPac Financial Holdings Co (建華金控).

"Differentiated services will be provided in accordance with a client's financial portfolio," Lin said, acknowledging that clients with better credit will have greater bargaining power and enjoy better financial services and rates.

For those with poor credit, Lin said that banks will not tighten their credit policies on high-risk clientele, but will impose higher charges since the risk will be carefully calculated and covered under the new Basel II capital framework.

In preparing for Basel II's implementation, most Asian banks will have serious work to do in building up their database of loss histories, developing more robust risk rating systems, and quantifying their risk exposure, Fitch said.

Currently, most Taiwanese banks plan to implement Basel II gradually, which Fitch Ratings said will give banks more time to develop and refine their internal risk assessment capabilities.

But the biggest challenge facing the financial holding company in implementing Basel II is building up an electronic database that includes a company's past transactions and peripheral risk information, a Fubon banker said on condition of anonymity.

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