Fitch says Asia Pacific banks not feeling the heat from final Basel rules

The majority of APAC banking jurisdictions are set to take the latest global iteration of Basel capital standards in their stride, says Fitch Ratings.

Banking groups in most APAC markets have been able to absorb the moderate increases in capital requirements required under the final Basel III standards, due to prevailing conservative regulatory approaches and less extensive use of internal models within the region. Few have implemented the rules in full so far, but we expect the transition will not have a substantial impact on capital requirements over the next two years - by which time adoption should be complete in most major APAC jurisdictions. This contrasts with US bank regulators’ estimate that adoption would cause a 16% increase in common equity requirements for large US banks - although the actual impact is likely to be lower if US authorities adopt less onerous rules - as suggested by the Federal Reserve Chair earlier in March 2024.

Australia adopted the final Basel III package from 1 January 2023, which resulted in reported domestic bank common equity Tier 1 ratios improving by up to 100bp for the major banks, due to an easing in some of the conservative risk-weighted asset (RWA) calculations in place prior to the switch. Similarly, Indonesia’s pilot application of revised standardised approaches from January 2023 improved Tier 1 capital ratios initially by up to 300bp.

These observations align with the Basel Committee on Banking Supervision’s (Basel Committee) March 2024 monitoring report. This estimates, using end-June 2023 balance sheets, that a fully phased-in implementation of the final Basel III framework could lower tier-1 minimum required capital for internationally active large APAC banks (disclosed in the publication as the ’Rest of the world’ category, but predominantly APAC) by an average of 0.8%. This compares with its estimated tier-1 requirements being 18.3% and 1.3% higher for the large European and Americas banks, respectively, albeit based on a full transposition of Basel rules, which sometimes differ significantly from actual legislative proposals.

China launched its domestic implementation of final Basel III at the start of 2024, and will be followed by Japanese internationally active banks from end-March. Fitch does not expect the Japanese megabanks will report a significant impact in the first year of implementation, with the exception of Mitsubishi UFJ Financial Group, Inc. (A-/Stable/a-) where removal of capital floor-related buffers will reduce its overall RWAs. Singaporean banks will go live under the new regime from July, and then Hong Kong and Malaysian banks from January 2025. We believe they will do so largely faithfully, since authorities in these major systems are Basel Committee members, and so committed to applying the final Basel III framework.

South Korea, another Basel Committee member, has already implemented the revised credit risk, market risk, and credit-valuation adjustment measurements required under the final Basel standards in 2023, along with preferential risk-weightings to corporates and SMEs, as part of their pandemic era relief package. India has yet to publicly disclose its implementation timescales, although as a Basel member jurisdiction it will be under moral suasion for a timely and full implementation.

Authorities in other APAC systems, but particularly within emerging markets, have generally taken a more conservative prudential approach, and do not permit using internal models (with a few exceptions). As such, these jurisdictions face less impetus to implement the final Basel III framework - including the output floor that ties modelled estimates to a fixed proportion of standardised supervisory risk-weightings. Vietnam, for example, only transitioned fully to the Basel II framework in 2023, and we do not expect a transition to Basel III rules in the next two years.