Delegates at this month’s second ASEAN regulatory summit – held in Singapore and hosted by media and information group Thomson Reuters – heard that four broad themes in global financial regulation currently have the greatest impact
First of these, according to Lutfey Siddiqi, Adjunct Professor at the National University of Singapore and a governor of the London School of Economics (LSE), is the Basel III capital adequacy regime, its predecessors and the proposed Basel IV, which have become an “unending series of sequels, with layers and layers of complexity. The questions that need asking, then, are whether Basel is still fit for purpose or whether it needs a reboot. “Do we need to go back to basics and see whether it needs an overhaul?”
Siddiqi said that regulators are about halfway through the timeline for international financial regulations. Basel III, issued in December 2010, resulted in more capital, cyclical buffers, limits, counterparty valuation limits, and liquidity coverage ratios (LCRs). 2013 brought the start of Dodd Frank reporting, the Volcker Rule was introduced last year, and the international Financial Stability Board (FSB) issued various measures in November 2015 for the 2019-22 period. Basel IV, which came out in January 2016, is due to be implemented in 2019.
“It’s incredible that all of a sudden we’re surprised at results. Internal models are throwing up different risk-weighted asset (RWA) numbers for similar risks,” he added. “We now seem to be going back to standardised models. We’ll be running internal and standardized models at the internal and desk levels. It’s ironic that we’re raising more capital against illiquidity risk when risk is caused by over-the-counter (OTC) fixed income. There is a fallacy of composition.”
The second theme cited by Siddiqi was a review of whether the regulations are necessarily fit for purpose in Asia, even if they meet requirements globally. In many countries in Asia, he noted, the socioeconomic, political and historical context require different things. “For ASEAN, feel free to break away, and stop being a price taker. Either jump in and say global harmonisation is over-rated and put on the brakes, or set up your own Basel Committee.”
Thirdly, banks don’t have the moral authority to push back on regulation even where it may be warranted, given that they clearly have vested interests. Since the cost and consequence of a steady march toward regulation will be felt by both consumers and corporates, Siddiqi proposed that corporate treasurers should help establish the regulatory framework.
Finally, Siddiqi suggested that appropriate conduct and culture are critical, especially in global markets. “We need to keep the focus on culture change, but not with pop culture,” he quipped.
One approach is the lead taken by the UK, which established the world’s first financial conduct authority. In other regions, companies need to “decide whether to lead with principles and values, or be so highly prescriptive and take micro-surveillance to such extremes that people leave their brains at the door. You can’t have mistrust of employees and expect them to become caring.” That’s why, he said, culture is changed most effectively through values and principles.
ASEAN regulatory frameworks and Basel IV
On the issue of whether the ASEAN region needs to do more to grow and to ensure the soundness of its financial system, Siddiqi said that ASEAN still doesn’t feel like an economic community yet. Whereas the European Union (EU) is massive and its secretariat is well-funded, “ASEAN is at the other end of the spectrum.”
One area on which ASEAN needs to focus on is financial integration, he said, and it should also bring in a regional response to global regulations. Deutsche Bank’s head of group regulatory affairs for Asia Pacific (Apac) Katie Melville added that if a supra-national body is given a mandate to propose solutions, ASEAN will be able to end up with the capacity and expertise to undertake that debate.
Turning to Basel III, Melville said that although the philosophy behind the regime wasn’t a big departure for Asian regulators, Basel IV it will result in a material change. “Having been told you need your bank to take internal responsibility, now they’re saying forget all that highly developed risk management infrastructure and do it different.” Jing Gu, senior counsel for the International Swaps and Derivatives Association (ISDA) added that Basel IV goes back to the standardised model and will deliver further challenges.
Siddiqi noted that there is now more risk at banks in ASEAN than in the recent past. Going into the 2008 global financial crisis, he said, they had healthy balance sheets and today “it’s not as good as it used to be.” An even bigger issue, he said, is that regulators are “making it up as we go along. There are costs along the way. The process needs more accountability.”
Reputation at risk
Earlier at the summit, Thomson Reuters managing director Sanjeev Chatrath kicked off proceedings by outlining four key themes that characterise regulatory developments in Asia this year. As background, the main themes at last November’s inaugural Summit were rising volatility; the pace of regulatory reforms; and the role technology was playing in helping regulators become more effective while helping the regulated to get more compliance.
Although those themes still resonate, there have been significant changes. This year has seen an increasing focus on the unintended consequences of regulations. There has been a rise in nationalism – not just from regulators – leading to increased calls for local data centers and locally incorporated companies. What is especially different, Chatrath said, is the emphasis around financial inclusion and ensuring that companies “bring everybody along.”
There is also greater attention paid to the conduct of senior executives. While there has been talk for a long time about the “tone at the top,” examples such as the financial scandal surrounding Malaysia’s state development fund 1MDB and the Panama Papers data leak on tax avoidance policies show that the repercussions of less-than-exemplary conduct are set to have a significant impact for a long time. “There is something foundational.”
The third theme, Chatrath said, is financial crime and reputation risk. He cited the BSI Bank case in Singapore last May, when the Swiss bank’s operations in the city state were shut down by the Monetary Authority of Singapore (MAS), is the first time in three decades that there have severe consequences for lapses in Anti-Money Laundering (AML) compliance. There have also been punitive fines for violations at Mega Bank in Taiwan.
The bright spots, he said, are new technologies and solutions that provide greater insights around trade finance and that use the power of data to become more predictive. Moving forward, he expects industry-wide solutions to reduce costs and improve effectiveness even further.
The final area is cyber, which can be viewed as a threat or as an opportunity. While the threat is always talked about and the underlying payments infrastructure continues to be exposed to vulnerability, there could also be opportunities for start-ups or other companies that are not burdened with the same infrastructure.
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