New global liquidity requirements pose significant challenges for banks across Asia, according to a new KPMG report, which highlights key concerns including rising costs and potentially reduced profitability.
Improving banks' management of liquidity and increasing the size and quality of the cushion of liquid assets they hold, are key elements of the "Basel III" package of measures that banks globally are being required to implement to boost their financial strength and resilience through periods of stress or market disruption.
KPMG's new report, titled "Liquidity: A bigger challenge than capital" notes that a number of regulators - in Australia, Mainland China, and Hong Kong – have been quick to engage with the banking industry on the new requirements, but many regulators in the region are adopting a "wait and see" approach, leaving their banks in the dark as regards their intentions.
"It is clear that implementation of the new liquidity requirements in Asia is going to be a much bigger deal, and have a much bigger effect on the industry, than the new capital requirements," says Simon Topping, China-based head of KPMG's Financial Services Regulatory Centre of Excellence for the Asia Pacific region.
"There are a number of issues around the region, such as the lack of enough high quality liquid assets in some countries, and the unpreparedness of banks' IT and risk management systems for adopting the new requirements."
Hong Kong banks for example are set to face significant challenges, says Topping. "First, there is the issue of whether the more complex requirements would be overkill for the smaller banks. Second, the thorny issue of how to apply the requirements to foreign bank branches. And, third, the currency angle, with banks' business effectively split into three currencies – Hong Kong dollar, US dollar, and Renminbi," he explains.
In terms of the impact on the major banks in China, again, it is liquidity rather than capital which is likely to be more of a challenge and to require more major changes in their liquidity management and systems. Until now the focus of Basel implementation in China has been very much on credit, market and operational risk, so there will be a lot to do on the liquidity front.
The foreign banks in China meanwhile, will likely face the additional complication of having to grapple with differing requirements and priorities from their home country and host country regulators.
"China is a special case on the liquidity front for many reasons, including the somewhat closed nature of the banking system and controls on the Renminbi", says Topping. "But China too is committed to adopting the new requirements, and the banks will benefit from enhancing their asset and liability management in line with the Basel III approach."
The report also highlights that concerns have been voiced in some quarters regarding the possible destabilising effect on financial activity and economic growth of introducing the Basel III changes at a time of uncertainty on the global economic front.
"Regulators are certainly getting more concerned about the possible "unintended consequences" of regulatory reform," concludes Topping. "But those concerns should be lessened by the fact that most regulators in the region are phasing in the new measures over an extended period."
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