Implications of Basel III for Developing Economies

Daranee Saeju Bank of Thailand

High-Level Policy Dialogue Macroeconomic Policies for Sustainable and Resilient Growth

in North and Central Asia Almaty, Kazakhstan, 27 August 2013

Agenda

• Overview of Basel III framework • Unintended consequences from Basel III

implementation • Ways to mitigate the negative impacts • Regional cooperation

– Areas that could be strengthened – Thailand experience

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Basel III aims to enhance banking sector resilience, by strengthening all the three pillars of the Basel Accord…

Source: Implementing Basel III: Challenges, Options & Opportunities, White Paper September 2011, Moody’s Analytics.

…with both micro-prudential, • Raise the quality of capital with greater focus on common equity to absorb

losses • Increase risk coverage esp. related to capital market activities • Require higher level of capital, including a capital conservation buffer • Introduce minimum global liquidity standards consisting of both short-term

and longer-term ratios

Enhanced Minimum Capital and Liquidity

Requirements Pillar 1

Enhanced Supervisory Review

Process

• Strengthen supervisory review process and promote the adoption of stronger risk management practices by the banking industry

– with additional guidance in the areas of sound valuation practices, corporate governance, compensation, risk appetite, risk aggregation, and stress testing. Pillar 2

Increased Transparency & Market Discipline

• Increase transparency requirements for more complex market activities • Heighten market discipline through enhanced public disclosure

Pillar 3

…as well as macro-prudential regulations

• To prevent the build-up of excessive leverage – Leverage ratio

• To reduce procyclicality – Countercyclical capital buffer – If a bank’s capital falls below the 2.5% conservation buffer,

supervisors will constrain distributions and bonuses

• To address systemic risk and interconnectedness – Additional loss absorbency requirement: 1%-3.5% capital

surcharge – Recovery and Resolution Planning requirement

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Potential unintended consequences

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cost of banking intermediation

Lending capacity Cost of credit

Restrain economic growth

Deleveraging

Retrench out of developing markets Highly volatile capital flows

Complicate macro management

Financial stability issues

Basel III Implementation in

advanced economies

Own implementation

Stability

Growth

• Further deepen financial intermediation – Increase access to low-income and rural households, and

SMEs

– Strengthen monetary policy transmission mechanism

• Building a resilient domestic financial sector – Strengthening supervision

– Develop deeper capital markets

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Ways to mitigate the negative impacts

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Areas to strengthen regional cooperation

Regional cooperation

Banking supervision and financial regulation

Development of deeper domestic

capital market Building more

robust financial infrastructures

• Development & linkages of payment & settlement systems

• Information exchange • Harmonization of

regulations

• Variety of issuers • Diversified investor base • Clear rules and regulations

Regional cooperation: the case of Thailand and Asia • EMEAP: Executives' Meeting of East Asia-Pacific Central Banks

– Asian Bond Fund (ABF) – EMEAP Crisis Management and Resolution Framework – EMEAP WGPSS-WGFM joint taskforce on cross-border collateral arrangements

• ASEAN Economic Community (AEC) – Qualified ASEAN Banks (QABs) – ASEAN Link – ASEAN Pay

• ASEAN+3

– Chiang Mai Initiative (CMI)

– Asian Bond Market Initiatives (ABMI)

– ASEAN+3 Macroeconomic and Research Office (AMRO)

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EMEAP Executives' Meeting of East Asia-Pacific Central Banks

• What: A cooperative organization of 11 central banks and monetary authorities in the East Asia and Pacific region

• When: Established in 1991 • For: strengthening the cooperative

relationship among its members

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Governors' Meetings

Deputies' Meetings and the Monetary and Financial Stability

Committee (MFSC)

Working Groups

Organization structure:

1. WG on Banking Supervision (WGBS) 2. WG on Financial Markets (WGFM) 3. WG on Payment and Settlement Systems (WGPSS)

11 ASEAN Economic Community (AEC)

ASEAN Economic and Monetary Cooperation

Semi-fully integrated

market

Fully integrated market

Assess financial sector regimes and Policy landscape and recommend

detailed Financial Integration

Implement strategies in Capital Acct. Lib. Capital Mkt. Dev.

Fin. Serv. Lib. Payments/

Settlements

Guiding Principle by ASEAN Leaders:

“to transforming ASEAN into a region with free movement of goods, services, investment, skilled labor, and

freer flow of capital.”

Goods Services &

Fin Services Investment AEC

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Financial Integration

Financial Integration

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ASEAN Financial Integration

1. Ministers/ Governors

2. Deputies

3. Working groups

Three-level structure:

ASEAN Finance Ministers’ Meeting (AFMM)

ASEAN Finance and Central Bank Deputies’ Meeting (AFDM)

ASEAN Central Bank Deputies’ Meeting (ACDM)

Working Committee on Capital Account

Liberalization (WC-CAL)

• Freer flow of capital, while safeguarding financial and monetary stability and Balance of Payment (BOP) position

Working Committee on Capital Market Development

(WC-CMD)

• Facilitating non-resident bond issuance and cross-border investment

Working Committee on Financial Services

Liberalization (WC-FSL)

• Equal Access,

Treatment and Environment for financial services

• Progress and structure of liberalization underpinned by financial stability

Working Committee on Payment and

Settlement System (WC-PSS)

• Integrated Payments

& Settlement Systems to support trade, capital & retail transactions

ASEAN Central Bank Governors’ Meeting (ACGM)

Capital Account Roadmap

Key initiatives

ASEAN Link

ASEAN Pay

Qualified ASEAN Bank (QAB)

ASEAN +3

• Established 1999 after the Asian crisis • 10 ASEAN countries + China, Japan and Korea • To strengthen regional cooperation in the areas of

1. Financial safety net • Chiang Mai Initiative Multilateralization (CMIM)

2. Capital market development • Asian Bond Markets Initiative (ABMI) : develop regional bond market with 4

taskforces on supply, demand, regulatory framework, and infrastructure (since 2003)

3. Macroeconomic surveillance • ASEAN+3 Macroeconomic and Research Office (AMRO) established 2011, located in

Singapore

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Regional cooperation to strength financial safety net

• Chiang Mai Initiative Multilateralization (CMIM) • ASEAN Swap Arrangement (ASA) • Bilateral local currency Swap Arrangement (BSA)

+ Crisis Prevention

$240 bn

$0.2 bn

$1 bn

$2 bn

CMIM ASA

The end! Thank you for your attention

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