Final Basel III to have muted impact on most Asia-Pacific banks

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The potential impact on minimum required capital from the final Basel III regime will be muted across most APAC banking jurisdictions, which have generally adopted more conservative regulatory approaches and make less use of internal models than in Europe to estimate risk-weights.

The impact of the final rules will be much higher in Europe because banks there rely more heavily on internal models, which are affected by the Basel III output floor that ties modelled estimates to a fixed proportion of standardised supervisory
risk-weightings.

The Basel Committee on Banking Supervision’s February 2022 monitoring report (using end-June 2021 balance sheets) estimates a fully phased-in implementation of the final Basel III framework could even lower the Tier 1 minimum required capital for internationally active large APAC banks (disclosed as the rest of the world category but mainly APAC) by an average of 5.5%. This compares with an increase in Tier 1 requirements of 18.0% and 4.7%, respectively, for the large European and American banks.

Although many APAC banking jurisdictions have made progress in implementing the final Basel III rules, timelines have been inconsistent or uncertain in many markets. Still, for banking systems where authorities are Basel committee members and so committed to applying the final framework, we believe they will do so in a largely faithful manner. Major systems led by Australia, followed by Japan, Hong Kong and Singapore, have scheduled full implementation. We expect these jurisdictions, all members of the Basel committee, to continue their progress in 2023.

Australia has finalised its domestic implementation of the framework, effective as of 1 January 2023, and Singapore has indicated it will hold its domestic banks to the same go-live timeline. Hong Kong has said that revised frameworks for credit and operational risks, including the output floor, would take effect six months later in July 2023, and market and credit valuation adjustment (CVA) risks no earlier than January 2024.

Japan, on the other hand, has extended its implementation to March 2024 for internationally active banks and domestic banks using internal models. South Korea, another Basel committee member, plans to implement the revised market risk and CVA measurements in 2023.

The final Basel III credit risk package, such as lower risk-weights for SME loans and loss-given default rates for business loans, were adopted early by all Korean banks except some small banks during 2020-2021, as part of a pandemic relief package. Implementation timescales for remaining APAC banking systems remain unclear. Still, other Basel member jurisdictions, such as China, India and Indonesia, are likely to be under moral suasion for a timely and full implementation even though clear plans have yet to be publicly disclosed. We expect China to progress its policy formulation during 2023 for capital, liquidity, market risk and CVA, although the timing for finalisation is uncertain.

Authorities in other APAC systems, particularly within emerging markets, have generally taken a more conservative prudential approach and do not permit using internal models (with a few exceptions). So, these jurisdictions face less of an impetus to implement the final framework, including the output floor. Vietnam, for example, is only fully transitioning to the Basel II framework in 2023 and does not permit the use of internal models. Sri Lanka has held discussions on advancing regulatory standards, but stresses to the banking sector from the economic crisis are likely to delay further progress. Even so, as Sri Lankan banks use the standardised approach to estimate credit risk, this would limit the impact on minimum capital requirements if the country were to shift to the final Basel III standard.