1. The Impacts of Basel III on Asian Banks
Deloitte Touche Tohmatsu LLC
Tsuyoshi Oyama
This paper does not include the official view of Deloitte Touche Tohmatsu LLC but only reflects the lecturer’s own opinion.

2. Basel III --- Regulator’s Perspective
More capital
More capital for underestimated risks under Basel II – trading, securitization
Capital buffer for mitigating procyclicality
Capital buffer for systemic importance
Decline in risk allowance of regulators
More good capital
Introduction of “Common Equity Tier 1” capital
Regulatory focus shifting from gone-concern to going-concern basis
More prescriptive and simpler/less risk sensitive
Financial innovation oriented regulation vs. Financial stability oriented regulation
Pillar I-nization of Pillar II
Leverage ratio
Wider scope of risks
Systemic risk (moral hazard)
Liquidity risk
Less procyclical and more macro-focused

3. Basel III --- Impacts on Asian Banks In General
More capital
Many Asian banks already had a high level of capital thanks to the lessons learned from their past crises
Asian banks’ trading and securitization businesses tend to be small
More good capital
A large share of Asian banks’ capital is composed of common equity
More prescriptive and simpler/less risk sensitive
Historically, the regulations in the region tend to be prescriptive (e.g. Pillar II)
A majority of Asian banks currently adopt the standardized approach of Basel II, which is conservative and less risk sensitive than the advanced one
Wider scope of risks
Systemic risk: very few candidates for global sifis
Liquidity risk: a big burden for many banks in the region where the size of sovereign bond market tends to be quite limited
Less procyclical and more macro-focused
A possible burden on banks in the region that grows rapidly

4. Basel III --- Impacts on Japanese Banks
More capital
A big challenge for Japanese banks, of which capital adequacy ratio and also profitability are low
Japanese banks’ trading and securitization businesses tend to be small though they were expected to boost their profitability before the crisis
More good capital
The share of deduction item from core Tier 1 capital is relatively high
More prescriptive and simpler/less risk sensitive
Japan FSA has long emphasized the importance of rule based approach and Pillar II process, which might be set back by Basel III
Many Japanese banks adopt the IRB approach of Basel II, of which risk sensitive principle might be confused by the risk insensitive measures.
Leverage ratio could be a future potential burden on Japanese banks given their increasingly holding of governmental bonds
Wider scope of risks
Systemic risk: some but few potential candidates for global sifis
Liquidity risk: no serious concerns
Less procyclical and more macro-focused
No serious concerns

5. Comparison of Capital, Liquidity and Return Ratios (2009)
(Source) Disclosure reports

6. Comparison of Liquidity and Trading Risk (2009)
(Source) Disclosure reports
(Source) Flow of Funds statistics

7. Development of Countercyclical Capital Buffer
(Source) BCBS “Guidance for national authorities operating the countercyclical capital buffer” December 2010

8. Basel III --- Impacts on Businesses and Risk Management of Asian Banks
No big impacts on retail and corporate banking businesses
However,
Banks might have less margin to accommodate high lending growth to support high economic growth
Banks might face intensified competition with Western and Japanese banks, which are motivated by Basel III to boost their profitability in the conventional banking market in Asia
Huge impacts on investment banking and trading businesses though the size of business is limited in the region
Banks need to seek the innovative way to support various trading and securitization businesses to address the risk concentration in the banking sector and also to satisfy the diverse needs of the corporate sector
Risk management
No big impacts on credit and op risk management
Stress scenarios might have to be reviewed based on the lessons from the crisis
Some impacts on economic capital modeling
Integration of risk appetite framework and stress testing outcome a huge challenge
Huge impacts on market and liquidity risk management
Counterparty risk, Stress VaR, stress testing, LCR how to align the realities with the regulatory expectations

9. Basel III --- Impacts on Businesses and Risk Management of Japanese Banks
Big impacts on retail and corporate banking businesses given the current low profitability
Banks are hard to economically justify a high level of newly required capital given the current business model  they should drastically restructure their business model to boost their profitability
Banks need to address the over-banking situation in the domestic market through more M&As to regain a reasonable margin
(In the case of global banks) banks need to mobilize their management resources to cultivate more aggressively Asian markets with a longer time horizon
Huge impacts on investment banking and trading businesses though their business sizes are limited
Banks need to develop the capital-efficient profitable financial markets based on more secured technique to diversify the risk among diverse risk takers in cooperation with Basel III-free nonbanks
Risk management
Basically the same with other Asian banks except:
Banks need to analyze more their facing macro risks, particularly the one associated with Japanese fiscal deficit