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Asian Banker Teleconference April 2011

Explore the impact of Basel III on Asian banks, including capital, liquidity concerns, and remaining issues with CVA and regulatory distortions. Dive into the implications for economic growth and potential strategies for addressing these challenges.

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Asian Banker Teleconference April 2011

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  1. Asian Banker Teleconference April 2011

  2. Macro Issues on Basel III • Capital and Liquidity requirements are increased significantly. The new rules address some valid points, but there are consequences • Capital • Capital has already been raised by many banks, but more is expected • It may not be attractive for investors, unless at discount from today’s price • Alternatively banks can try and lay-off assets to shadow banking sector • Otherwise balance sheets will shrink and economic growth will be impacted • Liquidity • This would appear to be an even bigger problem given the total size involved (EUR 4.5 T according to McKinsey study) • Under Basel III and Solvency II rules bank bonds are not favored, so who would be the buyer of these bonds? Conclusion • It is fair to assume that adoption of Basel III will have a negative macro-economic impact, the size of which remains unclear

  3. Basel III effects on Asian banks • On average Asian banks are better capitalised and more liquid than Western counterparts • There are some concerns though • Currency mismatch between retail deposits and loan base • Insufficient sovereign and corporate bonds for liquidity ratio • Foreign sovereign bonds bring credit and currency issues

  4. Remaining issues with Basel III • Even after latest changes there are remaining concerns with CVA • Level of capital required (estimates are doubling of capital) • Very limited recognition of credit hedges • No recognition of IR/FX/EQ elements of CVA charge • On liquidity front • Ineligibility of trading assets for liquidity purposes • Level playing field concerns around committed central bank lines • Requirements for reporting during observation period unclear • Implementation work for enriching liability data • Regulatory distortions • Discrimination against holding bank bonds • Favouring sovereign bonds (the next shoe to drop?) • Fight for (qualifying) retail deposits)

  5. Remaining issues with Basel III • New Market Risk requirements for internal model based banks • Adding VAR, Stressed VAR and IRC seems over conservative • Central Clearing • Trading via CCP is favoured from a regulatory capital point of view • Outsourcing of risk management by banks • Banks still on the hook, whilst CCP competing for business • Implementation issues in calculating hypothetical capital shortfall • Effect on risk assessment via Economic Capital • Net result of Basel III will be that Pillar 1 will always be bigger than Pillar 2 • Banks will be tempted to merely manage regulatory capital • The role of Economic Capital will be weakened • Are we back to Basel I?

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