Asian banks will have a tough time meeting new global liquidity rules because of a shortage of assets such as top-rated government debt that can be converted into cash quickly, according to KPMG.
Lenders that fall short of the liquidity regulations, to be implemented under an international framework by 2015, may be forced to cut lending or compelled to hold more low-yield retail deposits, eroding their profitability.
Under the framework, known as Basel III, lenders including Hong Kong's Hang Seng Bank Ltd and Singapore's DBS Group Holdings must hold top-quality liquid assets that could meet all their net outflows over 30 days during times of acute market stress.As fiscally disciplined Asian economies have much lower levels of government debt than Western markets, there may not be enough of such assets to go round.
Australia has said it will help its banks get round this issue by allowing them to tap a liquidity facility run by the country's central bank.
Hong Kong is proposing that the rules will only apply to its ‘core’ banks whose operations pose a higher level of liquidity risk to its financial system.
“In the rest of Asia, many of the regulators haven't yet decided how or when to bring in the new rules, so consequently the banks are not kicking off their projects yet,” Simon Topping, KPMG's Asia-Pacific head of their Financial Services Regulatory Centre of Excellence, said in the report.
Many Asian banks also do not yet have the necessary risk management and computer systems in place to meet the rules, according to the KPMG report.
The report also raises questions about whether the rules will fully serve the purpose they were designed for — ensuring banks can meet all of their obligations if they face a sudden funding freeze.
“This is very much a Western developed approach and focuses on a 30-day time period. In Asia, when there are liquidity problems, they tend to be precipitated much more quickly,” said Topping, who used to oversee bank supervision for the Hong Kong Monetary Authority.
“Liquidity problems for banks in Asia are often due to rumour or reputation issues rather than problems in the market, so following this requirement to hold liquid assets according to this calculation doesn't solve these type of issues.”
KPMG said foreign banks with a big presence in Asia, such as HSBC and Standard Chartered, may also face a headache in the region following the rules from the local regulators as well as in their home country.
The Basel III rules for banks have generally received much less attention in Asia than in the West, because the region's lenders have larger capital bases than most of their European and US counterparts.from gulf news.