Stress to banking sector from economic crisis likely to delay further progress - Fitch Ratings | Daily News

Stress to banking sector from economic crisis likely to delay further progress - Fitch Ratings

The potential impact on minimum required capital from the final Basel III regime will be muted across most APAC banking jurisdictions, which have generally adopted more conservative regulatory approaches and make less use of internal models than in Europe to estimate risk-weights, says Fitch Ratings.

The impact of the final rules will be much higher in Europe because banks there rely more heavily on internal models, which are affected by the Basel III output floor that ties modelled estimates to a fixed proportion of standardised supervisory risk-weightings.

Sri Lanka has held discussions on advancing regulatory standards, but stresses to the banking sector from the economic crisis are likely to delay further progress. Even so, as Sri Lankan banks use the standardized approach to estimate credit risk, this would limit the impact on minimum capital requirements if the country were to shift to the final Basel III standard.

The Basel Committee on Banking Supervision’s February 2022 monitoring report (using end-June 2021 balance sheets) estimates a fully phased-in implementation of the final Basel III framework could even lower the Tier 1 minimum required capital for internationally active large APAC banks (disclosed as the rest of the world category but mainly APAC) by an average of 5.5%.

This compares with an increase in Tier 1 requirements of 18.0% and 4.7%, respectively, for the large European and Americas banks. Although many APAC banking jurisdictions have made progress in implementing the final Basel III rules, timelines have been inconsistent or uncertain in many markets. “Still, for banking systems where authorities are Basel committee members and so committed to applying the final framework, we believe they will do so in a largely faithful manner.”

“We expect these jurisdictions, all members of the Basel committee, to continue their progress in 2023. Australia has finalised its domestic implementation of the framework, effective as of 1 January 2023, and Singapore has indicated it will hold its domestic banks to the same go-live timeline.”

Hong Kong has said that revised frameworks for credit and operational risks, including the output floor, would take effect six months later in July 2023, and market and credit valuation adjustment (CVA) risks no earlier than January 2024. Japan, on the other hand, has extended its implementation to March 2024 for internationally active banks and domestic banks using internal models.

The final Basel III credit risk package, such as lower risk-weights for SME loans and loss-given default rates for business loans, were adopted early by all Korean banks except some small banks during 2020-2021, as part of a pandemic relief package. Implementation timescales for remaining APAC banking systems remain unclear.


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