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Asian Banker Research Proceedings Report

March 30th , 2011

“How will Basel III impact your Basel II-compliant risk management plan?”

The proceedings of the teleconsultation session with leading risk practitioners to determine the impact of the new global rules on bank capital and liquidity (Basel III) on Asian banks

I. Background

The following is the proceedings report of the teleconsultation session of senior bankers held on March 30 th 2011 to discuss the impact of the new global rules by the Basel Committee and the Group of 20 nations on bank capita and liquidity on banks in Asia.

The session was attended by a panel comprising Elbert Pattijn, chief risk officer, DBS Bank, Singapore, Tsuyoshi Oyama, former deputy director-general, financial system and bank examination department, Bank of Japan and partner, financial industries group at Deloitte Touche Tohmatsu, Japan, and Austin Trippensee, senior industry solutions specialist, Oracle Financial Services Software and moderated by Arush Chopra, senior analyst, The Asian Banker, Singapore.

The teleconsultation session discussed the driving forces, key concerns and challenges relating to Basel III that the Asian Pacific region’s leading banks are concerned with today.

II. Proceedings Location and Date

Date of meeting: March 30th 2010

Format: Teleconsultation session

III. In Attendance

The session was attended by the following 68 senior executives:

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Sal Full Name Title Bank Ms Helen Jang Senior Risk Manager GE Capital Mr Benjamin Frank EVP, Wholesale Credit Risk HDFC Bank Mr Martin Davies Risk Consulting, Banking Markets Casual Capital Margie Ms Pagdanganan Director, Audit & Risk Review Citibank Mr Suchir Swarup AVP, Market Risk Management OCBC Bank Mr Hong Li Director, Risk & Decision Management American Express Mr Lawrence Koh Risk Management, Global Consumer Group Citibank Singapore Limited Mr Choo Koon San VP & Head Asset Liability Management OCBC Bank Perumal Mr Ramanathan Executive Director Market Risk Pros

Ms Winnie Ng Analyst Maybank Mr Makoto Hamada Senior Sales Manager, Enterprise Accounts SAS Institute Pte Ltd Mr Sam Fox Senior Consultant Sheffield Haworth (Asia) Pte Ltd FVP, Integrated Risk Management and Analytics Mr Wirot Tantiapikun Department Kasikornbank Assistant Unit Manager, Integrated Risk Ms Ploi Notklao Management and Analytics Department Kasikornbank Thipvadee Unit Manager, Integrated Risk Management and Ms Sindhuseka Analytics Department Kasikornbank

Mr Rohit Suradkar Vice President, Market & Liquidity Risk BNP Paribas Mr Bart Piron Principal Consultant Algorithmics Singapore Mr Ayuth Krishnamara EVP, Risk Manangement Bangkok Bank Mr N. C. Raghava Global Risk Trainer Standard Chartered Bank Mr Abhijit Sinharoy Head, Enterprise Risk Management Visa International Assistant Manager, Risk Portfolio Management / Mr Wong Sing Foo Credit Risk Dashboard OCBC Bank

Mr Woon Chee Keong Head pillar 2 basel II Maybank Mr Jeffrey Chua Head pillar 3 basel II Maybank Ms Chio Su Lan Head ICAAP Pillar 2 Basel II Maybank Nandha Kumar Mr Subramaniam Head, Model Validation Maybank Mr Wong Yee Fun Head, Corporate Finance & Capital Management Maybank Mr Lim Hao Jyh AVP, Corporate Finance & Capital Management Maybank Ms Ee Seet Ching AVP, Corporate Finance & Capital Management Maybank Principal Consultant, Risk Management/Market Mr Lok Kok Wah Risk Murex South East Asia Pte Ltd Mr Ulrich Schanz Functional Architect Thomson Reuters Consumer Portfolio Analytics & Reporting, Ms Liu Na Consumer Credit Risk OCBC Bank Khaliza Adillah Binti Ms Khalid Head, Financial Analytics & Risk Management Maybank Head Portfolio Management, PBC - Global Mr Fakhri Sarjan Credit Products Deutsche Bank Mr Sukanto Ghoshal Lead Analyst GE Capital Mr Lana Awad Managing Consultant, Finance & Risk IBM Mr Kunal Chowdhry VP, Group Planning DBS Mr Khoo Teng Cheong Managing Director DBS Ms Sandy Tan VP DBS ______Retail Banking Benchmarking Competitive Working Session Page 2 of 4 Asian Banker Research Proceedings Report

IV. Key Discussion Points

The following were the issues identified by the attendees:

1. Macro issues on Basel III 2. Impact of Basel III on Asian banks 3. Concerns with Credit Value Adjustment (CVA) 4. Regulatory distortions 5. Concerns with central clearing 6. Effects on risk assessment via economic capital

1. Macro issues on Basel III

 Asian banks are better capitalised and more liquid than their western counterparts.  Capital has already been raised by many banks, but more is expected; this, in turn, will lower ROE and make banks unattractive for investors.  Banks may try to lay off assets to the shadow banking sector.  Even if the above does not happen, banks will have to shed assets to shrink their balance sheets, reduce the scale of operations and economic growth will suffer.  Liquidity is a bigger concern than capital owing to the sheer size of the debt banks will need to meet liquidity regulatory obligations.

2. Impact of Basel III on Asian banks

 Basel III discriminates against banks holding other bank’s bonds, while EU directive Solvency II does the same for insurers. As a result, large institutional investors will find it unattractive to hold those bonds, raising questions about who will hold them.  Basel III may heighten counterparty risk due to currency mismatch as the currency of the deposit base is mostly the local currency of the bank whereas a substantial part of the lending is in a different currency. Banks need to run a sizeable swaps book to hedge the mismatch between the currency of deposit and the currency of loans; but running a swaps book brings forth its own liquidity issues, making the bank vulnerable to counterparty risk.  Banks are supposed to hold a large quantity of liquid bonds, mostly sovereign issues, of which there is an insufficient volume in most Asian markets.  Asian banks will need to recalibrate the macro-risks they face and be creative enough to assume tail risks in macro-stress scenarios in a Basel III world.  They might also face intensified competition with western and Japanese banks, which are motivated by Basel III to boost their profitability in conventional banking in Asia.  There is a need to re-align risk management with regulators’ expectations that emphasise less risk allowance and establish a more top-down, group-wide risk management approach.  Banks need to support financial innovation, including various trading and securitisation businesses, to address risk concentration in the banking sector but still satisfy the diverse needs of the corporate sector.

3. Concerns with Credit Value Adjustment (CVA)

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 The level of capital required for CVA has almost doubled,although the impact of this measure will be felt more for western banks with large swaps books.  Very limited recognition of credit hedges.  No recognition of IR/FX/EQ elements of CVA charge.

4. Regulatory distortions

 Discrimination against holding bank bonds.  Sovereign bonds favoured.  In the absence of relevant bonds allowed for meeting liquidity requirements, banks will have to resort to funding lines from central banks. This leaves the question open if regulators will be able and willing to provide it given the cost involved in doing so. If some regulators do so while the others do not, it will create regulatory distortions in the region.

5. Concerns with central clearing

 Trading via central counterparties (CCP) is favoured from a regulatory capital point of view.  CCP clearing amounts to outsourcing of risk management by banks to a third party.  Banks will have no control over what counterparties they are dealing with as CCPs, for competitive reasons, may lower standards and deal with counterparties that a bank wouldn’t normally deal with, creating risks.

6. Effects on risk assessment via economic capital

 Net result of Basel III could be that Pillar 1 will always be more important than Pillar 2.  Banks will be tempted to merely manage regulatory capital.  The role of economic capital will be weakened.

For a full review of the presentation and further insights into benchmarking risk management, please visit www.riskandregulation.theasianbanker.com

This Asian Banker teleconsultation session was supported by Oracle Financial Services Software.

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