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The road to Basel III

Fitch notes that the MSAR has yet to implement a series of measures to comply with Basel III

Of 10 requirement parameters to be implemented by end-2016 relating to the international banking regulatory framework of Basel III, a recent report by Fitch Ratings highlights that the MSAR has yet to implement procedures in any of the categories.
The Basel III framework has been put in place to stabilise the international banking system by reducing banks’ ability to take on excessive risk – thus sheltering economies from that risk.
The implementation timetable for the framework is divided into two tranches, one from 2013-2016 and one from 2017-2019.
According to the current status of the capital requirements of banks, as noted by the report, local banks hold 8 per cent total capital ratio as their requirement, except for ICBC Limited, which applies 13 per cent given its 2009 acquisition of Seng Heng Bank.
With regard to this measure, the local banks show historical strength in assets and liquidity although some measures could require updates to avoid eventual weighting on the system.
‘We expect the authorities to re-define banks’ regulatory capital as per Basel III standards and conduct related-impact studies in 2017,’ notes the group in its report. However, certain aspects are not currently in the framework – such as the leverage ratio and the net stable funding ratio (NSFR), which the group notes the local Monetary Authority of Macau (AMCM) ‘does not have any plans to implement’.
The first (leverage ratio) is arrived at by dividing the value of the bank’s strength (tier 1 capital) by the bank’s average total consolidated assets (a sum of the exposures of all assets and non-balance sheet items) and set at 3 per cent up until the beginning of this year.
The second (NSFR) is the net stable funding structure, which ‘require banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities,’ according to the Basel Committee on Supervisory Banking.
The measures are intended to oblige banks to have a diversified portfolio and ‘sustainable funding structure’ to reduce risk, with the amount of available stable funding relative to the amount of required stable funding equalling at least 100 per cent ‘on an ongoing basis’.
In addition to the lack of implementation noted by the ratings agency, that for the banks’ total loss-absorbing capacity (TLAC) is also not expected to have requirements set on it ‘nor to establish a resolution regime,’ notes the report.
Overall, the ratings group does not expect the local monetary authority to ‘specifically designate any banks as systemically important in the near term,’ noting that ‘the banking system is dominated by Chinese entities, the largest being Bank of China’s Macau branch (42 per cent market share), and the regulator has only a limited incentive to apply tighter regulations to foreign owned banks.’
With regard to the local monetary authority being able to provide liquidity support to banks in case of crisis, the group notes that it ‘would provide’ support but that ‘we consider their capital support as unreliable – given the relatively large size of the banking system compared with the economy’.
This publication is currently awaiting responses from the AMCM and the Office of the Secretary for Economy and Finance and will further announce upcoming measures for local compliance with the standards, in comparison with the ratings agency findings, in forthcoming editions.