Hong Kong/Singapore: Regulators in most Asia-Pacific (APAC) markets are likely to remain proactive in their use of macroprudential measures, and this could have a greater near-term impact on banks’ operating environment and credit profiles than the adoption of Basel III global standards, says Fitch Ratings. That said, Basel III will play an important positive role over the longer term, as rules are fully implemented.
Regulators have leaned on a range of familiar measures to temper credit supply and cool property markets in recent years amid loose global monetary conditions. Tools used have included loan-to-value limits and risk-weight floors, as well as reserve requirements for deposits, stamp duties and taxes. Countercyclical capital buffer frameworks have also been adopted in some markets, although regulators have been less willing to use these than other macroprudential measures.
Macroprudential tightening typically has a positive long-term influence on bank ratings. It tends to constrain banks’ profitability in the short term, and can also trigger unintended consequences if used too aggressively. However, it should tackle asset-quality risks to the extent that it limits the build-up of credit and asset bubbles and dampens banks’ risk-taking during cyclical upswings. Measures focused on lending standards, capital and liquidity and funding profiles can also improve banks’ resilience to downturns.
The authorities in APAC will have scope to unwind restrictions over the next few years, if required, to offset the shift towards global monetary tightening. However, the general trend in the region is still toward tightening. Singapore, for example, raised stamp duty and lowered loan-to-value limits in early July, while Korea’s regulator plans to introduce a bank-specific Pillar 2 add-on and a sectoral countercyclical buffer for household exposure from 2019.
Indonesia’s removal of a 15% downpayment requirement for mortgages for first-time buyers from 1 August 2018 goes against this trend. The decision appears to be aimed at softening the economic impact of recent rate hikes, but could add to asset-quality risks. Taiwan has also eased some macroprudential rules over the last two years as the housing market has cooled.
Most APAC regulators are still committed to adjusting their capital and liquidity frameworks in line with the revised Basel III reforms. Those reforms have potential to strengthen credit profiles and regulatory frameworks. However, the benefits will take longer to materialise than the impact of macroprudential tools, as even the more sophisticated regulators may need to invest and train its staff to lead credible implementation. Australia is the only regulator that has commented on the endgame rules and issued a consultation on local implementation. Korea plans to issue a consultation paper in 4Q18.
Only Japan and Hong Kong are implementing total loss-absorbing capacity (TLAC) rules. Australia, Korea and Singapore are moving forward, but slowly, while China’s G-SIBs remain exempted until up to 2025.
Other significant regulatory changes include the adoption of IFRS9 accounting standards in most APAC markets in 2018. Banks’ interim disclosures indicated modest day-one effects, in line with what we expected, given favourable environments and scope to release prudential reserves.
Meanwhile, supervisory bodies are strengthening their attention on operational risk control, including conduct and governance. Regulators have imposed greater fines and penalties on banks over the past year, but the impact on these banks has been manageable in most cases. Many jurisdictions remain focused on anti-money laundering rules, which will gain in importance with the development of financial technology and as more APAC banks expand overseas. No APAC regulators have set firm rules on how to reduce cyber risks, although some have issued guidelines.