11 January 2012 - 2012 will be remembered as a watershed moment for global banking, with banks left no choice other than to completely overhaul their business models and structures.
Historic rates of return on equity have been destroyed by current market realities. Banks are already making radical adjustments in a desperate bid to create value for their shareholders and meet the regulatory challenges of de-risking and deleveraging. Consequently, simpler banking models and further shifts to Asia are on the cards. Similarly in Malaysia, with the implementation of Basel III phasing-in as of 2013, banks are expected to bring about some drastic measures to adjust to reforms. Banks will also be required to calculate and report their capital, leverage and liquidity positions to Bank Negara Malaysia based on the standardized reporting templates which will be issued in Q1 of 2012.
Anita Menon, Executive Director, Advisory, Financial Risk Management Services at KPMG in Malaysia, commented: “The regulatory debate and policy developments of the past three years have just been a warm up. 2012 is the year of action and a long and potentially difficult road lies ahead. We are witnessing the next wave of regulatory reform and while the first wave had put the spotlight on capital, the second wave is forcing senior executives at banks to re-think their business and operating models”.
“The key challenges facing banks can be summed up in two words - liquidity and capital – and as banks have been tasked with additional capital requirements, there will be continued focus on higher retention of earnings (rather than paying out as bonuses or dividends), cost reduction and reducing on- and off-balance sheet exposures. While reform in the area of capital is non-problematic for most of Asia and likewise Malaysia, the Basel III reforms in the areas of liquidity pose a much greater challenge, and a number of Asian jurisdictions face fundamental issues, particularly in relation to shortage of high quality liquid assets for banks to hold as liquidity.”
In Malaysia, bankers will be focusing on the setting and maintaining of internal capital targets, determining funding strategies, or pursuing transactions or strategies which could minimize the impact on capital levels in accordance to the implementation of Basel III. Prudent earnings retention policies are expected of Malaysian banks to adopt in order to meet the enhanced capital and liquidity requirements prior to the implementation date.
KPMG’s Evolving Banking Regulation report contrasts regulatory developments in Europe, the US and Asia Pacific. Despite the intention of the G20 to have regulatory convergence, the intensity and urgency of policy initiatives coming out of various jurisdictions is directly correlated to local market conditions. Consequently we are currently seeing regulatory reform being pushed harder in Europe and the US than in Asia.
Despite the fact that banks in the Asia Pacific region generally fared well during the crisis, Basel III implementation is still moving forward. Analysis of capital requirements under Basel, and current requirements in some Asian jurisdictions, suggests that some Asian regulators will be treating all their major banks as if they are systemically important. With all the focus on Basel III, it is easy to lose sight of the fact that there are numerous other issues facing banks in Asia notably how the macro-economic environment will develop. Regulators in China are now approaching implementation on a slower basis amidst concerns on the effect to the economy.
With Malaysia undertaking approaches in accordance to the reform package, an excessive focus on Basel III may likewise restrict growth of the economy. Especially if the approach of imposing additional loss-absorbency requirements for systemically important banking institutions in Malaysia is introduced (currently the regulations indicate that this will not be implemented as yet), this induces larger and more internationally-active banks to hold additional capital buffers as well as focus on quality assets. This in turn, will limit lending which may restrict growth of banks and the economy, which against the backdrop of continued global uncertainties, is not desired. It will therefore be a challenge to temper the implementation of the regulatory reforms against the nation’s desired economic growth.