The regulations under the Basel III has its pros and cons on the micro level of the economy particularly in the banking sector, accounting firm Punongbayan & Araullo (P&A) said in its quarterly report released in December 2013.
The P&A report titled “Reason + Instinct: A look at the banking industry” said that Basel III poses challenges and opportunities on the micro level as the regulations entail new costs as well as new business assumptions for lenders.
Basel III is a framework designed by the Basel Committee on Banking Supervision (BCBS) on the aftermath of the 2008 financial crisis. It is a reformed framework that succeeded Basel II and Basel 2.5.
The framework’s objectives are to strengthen the banking sector’s capacity to absorb shocks; to enhance the management of risk; and to increase transparency. Basel II tackles the areas covering capital adequacy, liquidity and systemically important financial institutions.
In the case of the Philippines, P&A report noted that the country is implementing more stringent capital adequacy standards.
The report cited a memorandum from the Bangko Sentral ng Pilipinas (BSP) which stated that the country’s universal and commercial banks must comply with Basel III’s capital adequacy standards by January 1, 2014.
In the BSP memorandum, banks will be required to have a 10-percent capital adequacy ratio. Of this, Tier 1 capital must form 7.5 percent. Of the Tier 1 capital, common equity Tier 1 capital must make up at least 6 percent.
“Basel III entails an operational burden of additional risk management requirements and changes to be made to bookkeeping and data management, for instance,” the report stated.
P&A also said that capital and liquidity burdens are also anticipated, which stem from capital charges in case of noncompliance with operational requirements as well as costs associated with higher liquidity thresholds.
“As a result, banks could reportedly face ballooning costs, losses arising from reallocation of assets, a narrowing of margins from lending activities, and restrictions on growth strategies,” it said.
The report also said that banks were advised to watch out for reduced returns on equity, which in turn could dampen investor appetite for bank equity and debt because of anticipated decreases in dividends.
“Strategies based on rapid expansion of capital and risk intensive activities will be impacted. But given that such strategies are unlikely in the Philippines, the more impactful elements of Basel are likely to be the requirement to understand and monitor risks and capital more actively,” said Rupert Coney, senior manager of financial services at Grant Thornton International, of which P&A is a member firm.
The report also said that a credit rating agency has noted that strong earnings and responsible management of banks in the Philippines will make for a relatively easy and smooth transition to Basel III.
“The hurdles, if any, will likely be seen among those banks that have been relying on growing their loan assets. Basel III rules will compel these lenders to reconsider growth plans amid higher margin pressures,” the report said.