Basel III presents business advantage

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Basel III should be considered a business advantage as it will push banks to use their capital wisely and seek for a more robust growth, accounting firm Punongbayan and Araullo (P&A) said in its quarterly report released in December 2013.

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The P&A report titled “Reason + Instinct: A look at the banking industry” said that the banking industry’s move to Basel III can be used as an opportunity to implement what could have been a much-needed reform of risk management.

Basel III is a framework designed to strengthen the banking sector’s capacity to absorb shocks; to enhance the management of risk; and to increase transparency. Universal and commercial banks in the Philippines was ordered to comply with Basel III’s 10-percent capital adequacy ratio standards by January 1, 2014.

“The regulatory reform will also prod banks to pursue more aggressively those client segments with high future growth, such as those in the green industry, as well as make a habit of more optimal usage of capital,” the report stated.

“Expected benefits arising out of a more stable and stronger banking system will largely offset the negative impact of RoE [return on equity]in the medium to long term,” said Dr. Valluri Subbarao of Grant Thornton India.

He noted that investors are likely to be amenable to “trade in higher returns for lower risks,” and thus the perception of less risky banks could very well be a boon to business.

The P&A report also suggested that strategies will have to be reassessed to consider the impact of Basel III on many areas including pricing, the target consumer, capital raising and data management.

“Pricing strategies, for instance, could range from either raising lending rates to make up for higher capital costs in a competitive market. This does not preclude improving the customer experience to edge out the competition,” it stated.

The report said that another aspect to consider in the Basel III compliant is the changes in bank’s risk appetite, noting that concentrating on higher quality borrower could be an approach but banks could also consider riskier assets that will reap higher profits.

Capital raising, on the other hand, will have to be navigated wisely by closely studying asset calculation and the existing capital structure before going to the market, it said.

The P&A report further mentioned that innovative approaches should also be considered, such as studying how to leverage the value for intellectual property assets as means to shore up capital requirements.

In terms of data management, the report said that Basel III is expected to put “additional pressure on already stretched risk systems,” as well as pose a challenge to the “availability and accessibility of additional data.”

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