We’ve blogged a lot about the various proclamations of the Basel Committee, specifically how our banking clients around the world are using analytics to ensure capital adequacy and manage portfolio risk. Under the most recent Basel III measures, banks would have to hold six percent of Tier 1 capital, up from the previously required four percent, with a supplementary conservation buffer of 2.5 percent by January 1, 2015, among other requirements.
Here in Singapore, the local regulator – the Monetary Authority of Singapore (MAS) – took this a step further. On June 28, MAS announced a Tier 1 capital adequacy requirement of eight percent, introduced a capital conservation buffer of 2.5 percentage points, and – more notably – accelerated compliance to meet these higher standards two years ahead of the Basel timeline.
While regulators in other countries are applying similar guidance on capital requirements, Singapore is the first to boldly accelerate the timeline. We view this as a good move, as Singapore’s banks are among the highest capitalized.
But while capital adequacy is a critical piece to restoring financial stability around the world, it is not the only piece, as FICO CEO Mark Greene recently told the Business Times, Singapore’s influential business daily. Mark opines that the new capital adequacy rules are “appropriate and achievable.” He elaborates further in this excerpt from the article:
“On average, top banks in Singapore and Indonesia have the highest core Tier 1 capital levels within Asia, he added, citing information from a Reuters study last year.
Market attention has been centred on banks' capital adequacy so far, but Basel III will also be introducing a liquidity coverage ratio - the Basel Committee expects banks to hold enough liquid resources to survive an acute stress scenario lasting a month.
One of the lessons banks learnt from the recent financial crisis was the need to hold more liquid capital, Mr Greene said. 'I have less fears about liquidity these days than I would have had a few years ago, but I also don't think that the regulations have been fully brought up to speed or up to date on that point,' he said. 'There's more thinking needed around what is the right level of liquidity.'”
There were three key lessons from global financial crisis: More capital. More liquidity. Size and interconnectedness matter.
The global regulatory conversation needs to involve all three aspects, as Mark points out. To improve upon these aspects, banks need to take a step back and understand the vulnerabilities of the external environment before deciding how to allocate capital amongst individual portfolios and the liquidity of those added buffers.
How should they do this? A good question. Stay tuned for a follow-up post in the next couple weeks.