Basel III Implementation: Challenges and Opportunities

One of the main reasons the economic and financial crisis, which began in 2007, became so severe was that the banking sectors of many countries had built up excessive on- and off-balance sheet leverage. This was accompanied by a gradual erosion of the level and quality of the capital base. At the same time, many banks were holding insufficient liquidity buffers. The banking system, therefore, was not able to absorb the resulting systemic trading and credit losses nor could it cope with the re-intermediation of large off-balance sheet exposures that had built up in the shadow banking system. The crisis was further amplified by a pro-cyclical deleveraging process and by the interconnectedness of systemic institutions through an array of complex transactions. During the most severe episode of the crisis, the market lost confidence in the solvency and liquidity of many banking institutions. The weaknesses in the banking sector were rapidly transmitted to the rest of the financial system and the real economy, resulting in a massive contraction of liquidity and credit availability. Ultimately the public sector had to step in with unprecedented injections of liquidity, capital support and guarantees, exposing taxpayers to large losses. The effect on banks, financial systems and economies at the epicentre of the crisis was immediate. However, the crisis also spread to a wider circle of countries around the globe. For these countries, the transmission channels were less direct, resulting from a severe contraction in global liquidity, cross-border credit availability and demand for exports. Given the scope and speed with which the recent and previous crises have been transmitted around the globe as well as the unpredictable nature of future crises, it is critical that all countries increase the resilience of their banking sectors to both internal and external shocks. To address the market failures revealed by the crisis, the Basel Committee introduced a number of fundamental reforms to the international regulatory framework popularly known as Basel III. The reforms strengthen bank-level or microprudential regulations which will help raise the resilience of individual banking institutions to periods of stress. The reforms also have a macroprudential focus, addressing system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time. Clearly these micro and macroprudential approaches to supervision are interrelated, as greater resilience at the individual bank level reduces the risk of system-wide shocks. In the light of above this paper examines issues, challenges and implications of implementation in Basel III in ten SEACEN member economies namely, Brunei Darussalam, Cambodia, Indonesia, Korea, Malaysia, Myanmar, Nepal, the Philippines, Sri Lanka and Thailand. The integrative report provides an overview and summarizes the findings of individual team reports on different aspects of implementation, challenges and implications.