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Australia, Singapore lead banking standards effort

Banks in Australia and Singapore are the most advanced in the Asia-Pacific region in implementing the "Basel II" regulatory standards, a managing director of the Standard and Poor's rating agency said yesterday.

Banks in Hong Kong, Taiwan and Japan are making "good progress" in meeting Basel II standards, Ian Thompson of S&P's corporate and government ratings office told a seminar on the sidelines of an Asian Development Bank meeting here.

However, banks in China, Thailand and Malaysia appear to be taking a "gradual approach" in meeting the standards, set in June last year by a committee of central bankers of developed nations that met in the Swiss city of Basel.

But Thompson said "a common theme is that all the banking markets are making progress to that goal."

"The Asia-Pacific region has diverse banking systems at different stages of evolutionary development and vastly varying degrees of industry and economic risk. Reflecting this, the degree of preparedness for the implementation of Basel II among banking systems in the region varies widely, although all are making progress," Thompson said.

He stressed that implementing the Basel II standards was a "big job" which requires large resources and great effort.

Thompson said meeting the norms would help instil "a stronger credit culture in Asia" and would spur greater interest in risk management systems, technology and experts in the region.

The Basel II accord upgrades an earlier capital management system agreed upon by the central bankers in 1988. It seeks to set uniform standards in the way banks and banking regulators carry out risk management.

"With higher capital charges for higher risk, the main implication for borrowers in the Asia-Pacific region is that banks will gravitate to lower risk assets, unless they are adequately compensated for the higher risk," Thompson said.

Although banks will still support and lend to domestic organizations, Clifford Griep, executive managing director of S&P, told the same forum that the Basel II framework will discourage relationship lending, while encouraging a stricter ricing regime for risk and promote earlier recognition of problem loans.

Thompson pointed out that banks in Asia were still extremely diverse and many were "technically insolvent" but expressed hope the Basel II standards would help investors decide to recapitalize the banks if their problems were clear.

Thompson said that meeting the new norms would help avoid a repeat of the 1997 Asian financial crisis which, he said, was caused partly by undisciplined lending.

"As for the impact on credit ratings, lower rated banks with asset quality, capital, and risk management challenges could be rewarded with higher ratings over time, should the implementation of Basel II lead to recapitalization and enhanced risk management systems and culture," Thompson said.
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