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Why Asian Banks are Well Positioned for Basel III 

November 24, 2016

Walter Yao, Federal Reserve Bank of San Francisco

After the global financial crisis, the Basel Committee on Banking Supervision (BCBS) implemented Basel III with the goal of fostering a more resilient global banking system. Among other measures, Basel III calls for an increase in both the quantity and quality of capital that banks must hold as a buffer against unexpected losses. 

The Liquidity Coverage Ratio (LCR) is aimed at reducing short-term liquidity risks by ensuring that a bank has sufficient high quality liquid assets to survive a significant stress scenario lasting for 30 days. The BCBS recommended the introduction of the LCR in January 2015; the ratio began at a 60% phase-in, increasing by ten percentage points a year to reach the full 100% requirement in 2019. The Net Stable Funding Ratio (NSFR) was also introduced in an effort to ensure that a bank’s long-term sources of funding would remain liquid during periods of financial stress. It requires banks to maintain stable sources of funding, such as traditional deposits, in relation to the composition of their assets and off-balance sheet activities.

A San Francisco Fed review of 75 major banks in 13 Asia Pacific economies indicates that, as of the most recent year-end 2015, the banks are well positioned to meet the Basel III minima for implementation in 2019.2 The strong position of Asian banks with respect to Basel III requirements can be attributed to the build-up of capital and liquidity buffers after the Asian Financial Crisis of 1997-8. Furthermore, Asian banks rely on less leverage and fewer hybrid capital instruments than their western counterparts, resulting in both higher levels and quality of capital. Read more

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