ABA discusses Basel 111 and preparedness for disasters

Sri Lankan capital markets are not as developed as some others in the regional sphere and the banking industry is expected to drive this sphere, Asian Bankers Association (ABA) President and HNB CEO/MD Rajendra Theagarajah said at a press conference to discuss outcomes of the ABA conference which was held from 3-4 October.

Members of the association discussed two position papers titled ‘Assessing Asian banks adherence to Basle 11 and their readiness for the new proposal under Basle 111’ and the other one titled ‘Promoting preparedness for operational or severe event risk among banks in the Asia pacific region’.

This became important in a climate challenged environment, HNB’s Deputy General Manger, Risk Management Dilshan Rodrigo said at the ABA press conference. The technical sessions were attended by panellists from East Asia, South Asia and the Middle East.

The ABA noted that there was wide acceptance of the Basel framework by regulators in Asia and Asian banks were well capitalised above global and local norms.

Basel II, which was published in June 2004,  is an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face while maintaining sufficient consistency so that this does not become a source of competitive inequality amongst internationally active banks.

Most Asian banks have successfully migrated to the Basel 11 framework and have systems in place to monitor credit, market and operational risks. Asian banks appear comfortable meeting required liquidity and leverage ratios. Further investigation may be required to assess the consistency and basis of calculations.

The consensus view is that ratios proposed under Basel 111 will help monitor contractual maturity mismatches and funding concentration but further behavioural analysis of data would be necessary to tackle liquidity concerns in the long term.

Most banks agree that implementation of the Basel framework will promote greater stability to the financial industry by giving value in excess of the cost of implementation, standardising disclosure requirements and contributing to a better risk management culture.

The majority of members were also convinced that this would lead to better standardisation of disclosure requirements in their respective countries, the ABA said in its news release.

The paper also proposed amendments to the Basel framework: Capital buffers should be less stringent for Asian banks weaknesses in Western banks should not be passed on to other regions, also due to the less complex derivative products in Asia. It suggested revisiting liquidity and leverage ratios and considering including debt issued by banks, investment and insurance firms to qualify as liquid assets with haircuts per credit ratings.

Panellists said that Asian Banks are less leveraged than their European Union and Western counterparts since measures had been put in place after the Asian financial crisis in 1997.

In its second paper the ABA noted that a majority of ABA members rated operational risk management, specially on natural disasters as being of the highest level of importance and are willing to share their contingency plans or coordinate with other ABA member banks.

The paper mooted creating a committee to study and implement cooperation approaches among member banks, identifying banks which can provide guidance on specific topics and natural disasters and disseminating non-bank best practices and other sources of information which have extensive or detailed coverage.

A position paper was presented which recommended enabling micro finance institutions to grow and substantially achieve greater financial inclusion. It was recommended that a regular legal and policy framework with strong supervisory mechanism be established in respective countries and that a code of conduct be established for investor funds in equity, debt and other collaborations and partnerships to avoid undesirable and unethical practices with a short term return orientation creeping into the industry.

Four key products and services should be targeted in this industry and these are credit savings, insurance and money transfer. Financial education should be incorporated in each and every product and micro entrepreneur skills development programmes to make the recipient of these services more responsible and accountable.

The ABA also agreed to develop two other papers as part of future policy advocacy work. One paper would focus on Asian Funds Passport Scheme based on the Undertaking for the Collective Investment of Transferable Securities. The paper will examine some of the developments in the Asian bond market and work undertaken in promoting the establishment of regional fund passport system.

The aim is to establish a multilateral framework facilitating cross border selling of Asian investment funds among participating nations and increasing co-operation between regional regulators. The second paper will focus on the Foreign Account Compliance Act of the United States and its implications for Asian banks.

The CEO forum for senior executives elaborated on the perspective of business modelling and new technology such as mobile phone banking as many banking services penetrate only 50% of the population.

The Association of Asian banks is a grouping 100 leading banks from 25 countries in the region. This was the first time the ABA held a conference in Sri Lanka. The conference was attended by 200 leading bankers and regulators from 20 countries. The conference is an effective forum for shaping policy and a lobbying voice for banks in the Asia Pacific, Theagarajah said.