Enhancing the Asia-Pacific Region’s Capacity to Implement the Basel II Framework
1. The Asian Bankers’ Association notes the increasing importance of enhancing credit and operational risk management in the region. In addition to recent uncertainties arising from developments in the US housing market, a number of developments that include wider use of increasingly complex automated technology, development of more sophisticated products for retail customers, increasing mergers and acquisitions, industry consolidation, internal reorganization and outsourcing, have underscored the need for robust risk management practices to ensure the soundness of banking systems and financial markets.
2. The ABA notes that bank regulators in the region are undertaking significant efforts to prepare themselves to properly implement Basel II. We are concerned, however, that the wide variations in the implementation of Pillar 1 among different jurisdictions within the region present challenges to banks operating in more than one jurisdiction. In light of these, we view current efforts to strengthen and develop cross-border collaboration among Asia-Pacific bank regulatory agencies, including participation in supervisory colleges, as a very important element in promoting sound and stable banking systems. We also believe that the annual dialogue jointly organized by ABA, the APEC Business Advisory Council (ABAC), the Pacific Economic Cooperation Council (PECC) and the South East Asian Central Banks (SEACEN) Center, which over the last three years has brought together bankers, regulators, officials and experts, is a noteworthy initiative that should continue to be supported.
3. The ABA notes the challenges that banks, especially those from emerging markets, face in implementing Basel II. With respect to credit risk, default data are still inadequate. Basel II implementation entails heavy investment costs, particularly in terms of human and capital resources. Many banks are still working on achieving the right balance between expert judgment and model results. With respect to operational risk, preparation for Basel II implementation involves significant time and effort, in particular to ensure that business units and top management give their full support. Regular disclosure requires the active cooperation of business units as initiators. Resource allocation requires support from top management. Business continuity poses another challenge, as banks are still learning to develop effective stress testing programs and disaster recovery plans.
4. We note, furthermore, that the most significant challenge for many emerging market banks in relation to Basel II is culture change. Implementing the new framework involves a shift in working procedures and mindsets from traditional top-down approaches to more participative ones where communication and transparency play very important roles. The new framework also requires the generation of comprehensive and more accurate data, and thus a change in roles of business units from passive compliance to proactive disclosure and self-assessment.
5. In light of the above considerations, the ABA recommends the following:
- Regulators should strive toward greater consistency of Basel II implementation within the region, including through active participation in the annual dialogue between bank regulators and the region’s financial industry organized by the ABA, ABAC, PECC and SEACEN.
- More intensive capacity-building efforts should be undertaken, especially (i) to assist emerging market regulators in moving from rules-based to principles-based supervision; (ii) to help promote transparency and strengthen understanding of risks and monitoring capabilities that are required for transparency to be effective; (iii) to promote convergence toward the International Financial Reporting Standards in support of effective Pillar 3 implementation; and (iv) to help strengthen banks’ governance systems in key areas, particularly with respect to the balance of powers between boards and management and between independent audits and boards, the quality of boards and their capacity to understand and approve risk management procedures, delegations and controls, the role of nomination committees, the independence of external directors, educating and training board members, and determining processes for assessing qualifications for prospective directors.
- Collaboration among regulators and between regulators and banks in the crossborder implementation of Basel II should be enhanced, in particular through early consultation among supervisors to avoid conflicting regulations and unnecessarily burdensome requirements for banks to provide similar information in different formats, communication to banks of the agreed respective roles of home and host supervisors, resolving differences in implementation (e.g., with respect to definitions) among home and host supervisors, and expanded participation in supervisory colleges by regulators in the region.
- Regulators should consider allowing banks’ overseas subsidiaries to adopt basic approaches for purposes of regulatory reporting with respect to capital adequacy requirements (CAR), in order to encourage banks to improve risk management practices while avoiding unnecessary burdens. In cases where advanced approaches are adopted for the whole banking group, regulators may consider giving a choice to overseas subsidiaries between advanced or basic approaches for local CAR reporting, in order to facilitate effectiveness and operational efficiency.
- In connection with the preceding recommendation, banks whose overseas subsidiaries are allowed to adopt basic approaches for regulatory capital purposes, especially if they have significant market and credit risk exposures, should nevertheless strive to develop the infrastructure required for the entire firm to ensure consistency in risk-adjusted performance measurement and strategic decision-making, moving toward eventual implementation of the same approaches in home and host countries.
- Banks, particularly where regulators have not yet finalized timelines for the implementation of Basel II, should undertake early data collection efforts to facilitate wider adoption of more advanced approaches to improve risk management.
- In order to facilitate culture change within their organizations, banks should undertake early preparations for implementing Basel II, including the planning of training and skills transfer. For banks that are using system vendors to develop risk management models, this will ensure that they are able to maintain systems on their own.
6. We believe that regional bodies, such as APEC, the Asian Development Bank and SEACEN, as well as regional private sector organizations, such as the ABA, ABAC and PECC, have a key role to play in promoting the effective cross-border implementation of Basel II in Asia, and that regional public-private sector dialogues involving bank regulators and financial industry representatives are very useful in helping both regulators and banks undertake the necessary preparations. The ABA reiterates its commitment to continue collaborating with governments and other regional and international groups to further these common goals in the coming years.
7 November 2007, Hong Kong