The Asia region and its banks may have dodged the full force of the global financial crisis, but the consequences of tightened financial regulations are only now beginning to unfold.
A recent survey of mostly retail and corporate banks from across the region conducted in September by KPMG and Oracle, shows that banks are most concerned with declining competiveness and the higher cost of capital – with capital expected to become more difficult to secure. High compliance costs was also an issue, with banks citing lack of internal expertise, complexity and inadequate clarity of proposed regulations, as well as worries over their own technological capabilities.
“If there is an underlying theme from these regulatory reforms, it is that the new regulations will hit banks’ top and bottom lines, and more costs will be transferred to customers,” said John Lee, KPMG Asia-Pacific leader for financial risk management.
The survey covered the regulations proposed by the International Accounting Standards Board (IASB), the Financial Stability Board (FSB), and the Basel Committee on Banking Supervision’s (BCBS) updates to the Basel Accord, known as Basel III, elements of which are particularly concerning to trade finance banks. Of the executives responding to the survey, 52% were C-class executives, ie, chief risk officers (CROs), CFOs or CCOs. Of these, 39% were CROs or equivalent, with the rest either heads of strategy or of compliance.
Respondents said that the areas which should be a priority to regulators were capital management, including the internal capital adequacy assessment process (ICAAP), liquidity risk management and enterprise-wide stress testing.
According to the survey, 40% of respondents thought that regulatory changes would improve the overall economic environment, with a similar proportion believing the impact would be neutral. Interestingly, only 20% stated that the reforms would impede economic growth in their own countries. This indicates uncertainty over eventual impact of reforms, according to the report. “This finding may indicate that while the regulatory reforms would restore public confidence in the economy in the short term, the impact may have a negative longer-term effect on economic growth in the respective countries,” it said.
In addition, over half of respondents said that their bank business models would have to adapt if they were to address the reforms. A further 48% said that banks would need to raise extra capital. The survey went on to ask what operating areas would be most affected, to which 78% cited lending and risk pricing, 59% cited performance management systems, 57% said trading counterparty transactions, and 35% said executive compensation.
According to KPMG and Oracle, the survey was designed to understand how banks and other financial institutions are responding to prudential and other regulatory initiatives and proposals. It also sought insights into how respondent banks expect these changes will affect them over the coming one to two years. Institutions surveyed came from Australia, Hong Kong, India, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand, most with assets exceeding $10 billion.