ABA Position Paper on Building Capacity for the New Basel Accord

2003 Policy advocacy3 700 x 466

Building Capacity in Asia-Pacific Banking Systems to Effectively Implement the New Basel Accord

1. The Asian Bankers’ Association (ABA) has underscored in previous position papers1 the importance of proper and effective implementation of the New Basel Accord for the soundness and safety of the global banking system. We noted the serious challenges that bank supervisory authorities in emerging markets face in this regard, and called for greater international cooperation to assist them in preparing to implement the new accord and in promoting robust risk management practices in the region’s banking sectors.

 

2. We welcome the strong support we have received on this matter from key regional organizations and the initial steps being taken by various authorities:

 

  1. We thank the APEC Business Advisory Council (ABAC) and the Pacific Economic Cooperation Council (PECC) Finance Forum for urging the APEC Economic Leaders and the APEC Finance Ministers to address these concerns.
  2. We note the APEC Finance Ministers’ positive response to these views during their meetings in Los Cabos, Mexico last year and in Phuket, Thailand this year, and welcome the initiative of Chinese Taipei to fund and organize a training seminar on the New Basel Accord for APEC members’ bank supervisors this year.
  3. We continue to appreciate the ongoing work being done by the Asian Development Bank (ADB), the Bank for International Settlements (BIS), the Southeast Asian Central Banks Research and Training Centre (SEACEN), the Executives’ Meeting of East Asia-Pacific Central Banks and Monetary Authorities (EMEAP), the Southeast Asia, New Zealand and Australia Forum of Banking Supervisors (SEANZA), the World Bank and the U.S. Federal Reserve System in training bank supervisors in the region with a view to implementing the New Basel Accord.
  4. We especially welcome the recent launching of the Advisory Group on APEC Financial System Capacity-Building in Phuket, Thailand, upon the initiative of ABAC and PECC. We believe that this body, with the cooperation of the APEC Finance Ministers and key international and regional institutions, could play an important role in promoting synergy among institutions and between the public and private sectors to improve the effectiveness and efficiency of capacity-building efforts in preparation for the New Basel Accord.

 

3. This year, the ABA jointly undertook with the PECC Finance Forum a survey of the regulatory and business environment for risk management practices in banking systems throughout the region.2 We call attention to the key findings of the survey, particularly the following:

 

  1. Banks’ response to the new accord: Most banks in the region’s emerging and mature markets see the impending introduction of the New Basel Accord as an opportunity to substantially improve risk management practices in banking systems. Many emerging market banks intend to undertake a significant upgrading of risk measurement and management systems beyond the basic options offered under the new accord, and the number of such banks opting for the more sophisticated approaches is much larger than what supervisory authorities have expected.
  2. Preparedness of banks for the new accord: Emerging market banks face serious challenges in efforts to improve risk management practices to the level required by the new accord. The most critical of these resource constraints pertain to technology and data availability. Staffing is an important additional constraint in less developed economies, where many banks see themselves unable to complete preparations for the new accord by the end of 2006.
  3. Preparedness of bank supervisors for the new accord: Bank supervisory authorities in these emerging markets, whose preparedness is critical given many banks’ intention to adopt more sophisticated risk measurement and management approaches, also face considerable resource constraints with respect to staffing, technology and funding. A majority of authorities in the less developed economies likewise do not expect to complete their preparations by the end of 2006.
  4. Cooperation between banks and supervisory authorities: The successful implementation of the new accord and development of robust risk management practices in banking systems require enhanced communication and cooperation between banks and supervisory authorities, which at the moment are viewed as inadequate by most banks in the region’s emerging markets.
  5. Improving the policy, business and market environment. Promoting sound risk management practices throughout banking systems requires significant improvement in certain aspects of the policy, business and market environment in a number of emerging markets. Key areas that need to be addressed include systems for resolving problems in banks, accounting rules, auditing practices, payment and clearing systems, corporate governance, macroeconomic policy and undue political influence on business decisions. The development of strong capital and derivatives markets and regulators’ ability to supervise activities in these markets are also critical.

 

2003 Policy advocacy4 700 x 4664. In view of the findings of this survey, the ABA advises authorities in the region to facilitate the adoption of more advanced risk measurement and management systems by banks that are willing to do so. We call for further capacity-building efforts to ensure the adequate and opportune preparation by banks and bank supervisory authorities in the region to implement the new accord.

 

  1. We ask the APEC Finance Ministers, APEC member economies and relevant international and regional institutions to intensify capacity-building efforts to help develop supervisory skills that meet the requirements of the New Basel Accord; to promote cooperation among authorities in its cross-border implementation, especially in relation to complex banking groups operating in multiple markets and in observance of the High-Level Principles for the Cross-Border Implementation of the New Accord,3 recently published by the Basel Committee on Banking Supervision; and to address key problems in the policy, business and market environment affecting risk management practices in the banking sector.
  2. We encourage the newly established Advisory Group on APEC Financial System Capacity-Building to effectively promote greater coordination and synergy among on-going capacity-building programs for bank supervisors and wider involvement of the private sector, especially risk management experts from financial institutions, in the design and execution of these programs. We urge the APEC Finance Ministers to firmly support and actively participate in the work of this advisory group. We encourage international financial institutions, particularly the ADB, to explore ways of providing support for the sustained operations of this advisory group. We offer our cooperation to the advisory group in the development of its work.
  3. We ask supervisory authorities to more closely cooperate with the banking sector in preparing for the implementation of the New Basel Accord. We encourage bank supervisors to engage in active dialogue with banks on the design of measures to facilitate transition to the new accord.
  4. We call on international financial institutions, as well as public and private institutions in the more advanced economies, to work with the banking sector in promoting expanded access of banks, especially those from emerging markets, to high quality training in the use of advanced risk measurement and management approaches and systems. We encourage the participation of experts from bank supervisory authorities in such activities. The ABA hopes that the training project it is undertaking with the Australian APEC Study Centre for the benefit of its member banks from emerging markets, involving experts from the financial sector and from the Australian Prudential Regulation Authority, could serve as a useful model for such capacity-building activities geared toward the banking sector.
  5. Having successfully maintained a long-term partnership with the Asian Institute of Management in offering professional development programs for its members, the ABA endorses the value of closer cooperation between academic institutions and the banking sector to upgrade risk management practices in the region.

 

5. The ABA calls attention to the fact that banks continue to play the predominant role in financial systems for most economies in the region, and that financial stability within the regional and global contexts still hinges largely on the soundness of banking systems. Notwithstanding the various imperfections in its current draft, a number of which we have already pointed out to the Basel Committee on Banking Supervision,4 we believe that the New Basel Accord, if properly implemented, would be an important step in the right direction. Given the considerable challenges to its successful implementation in emerging markets, we reiterate our call for intensified capacity-building measures to help banks and bank supervisory authorities prepare to operate under the New Basel Accord.

 

7 October 2003, Manila.

 

[1] Strengthening Asia’s Financial Systems (http://www.aba.org.tw/doc/ABA%20Position%20Paper.doc), 2-3 Sept. 2002, Seoul, Korea; and Cooperative Measures to Help Bank Supervisory Authorities in the Asia-Pacific Region Implement the New Basle Capital Accord (http://www.aba.org.tw/doc/AbaB2PosPap01.doc), May 6, 2002, Seoul, Korea.

[2] The Regulatory and Business Environment for Risk Management Practices in the Banking Sectors of APEC Economies (soon to be published).

[3] High-level Principles for the Cross-Border Implementation of the New Accord [Basel Committee Publication No. 100] August 2003 (http://www.bis.org/publ/bcbs100.htm).

[4] Comments on the Third Consultative Paper on the New Basel Capital Accord [Asian Bankers’ Association Position Paper] July 28, 2003 (http://www.bis.org/bcbs/cp3/asibanass.pdf).

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