International Regulatory Framework Banks: An Overview Of Basel III

Banking System In Australia

Discuss About The International Regulatory Framework Banks.

Basel committee on banking supervision has been established in the year of nineteen hundred and seventy four. The major objective of its formation is to improve the supervision function of the banking industry and to provide the better understanding of the key issues related to banking supervision. It entails the application of defined set of policies and the standards. The committee has till now formed three standards namely Basel I, Basel II and Basel III. In this report, the emphasis will be on the Basel III.  It has been introduced after the global financial crisis which begins of the period from the year of two thousand and seven to two thousand and nine. Basel III specifies the minimum requirements which in general apply to all the banks. The major premise of the Basel III is to regulate, supervise and manage the risk of the banks and accordingly has provided the structure containing three parts namely capital adequacy and liquidity risk.

The report has been divided into two major parts. One is of the Task 2 which relates to the evaluation of the implications of Basel III on the banking system in Australia, China and India. Second is of Task 3 which explains how the particular bank of the particular country meets the Basel III requirements of having the capital adequacy ratio and the liquidity ratio. The report has then ended with the appropriate conclusion.

In this task, the banking system in Australia, China and India will be evaluated with regard to the implications of the Basel III. The different challenges posed by the inherent differences have been discussed.

The Australian Prudential Regulation Authority (APRA) has started the application of Basel III framework from the date of first of January Two thousand and thirteen. Capital of the banks represents the ability of the bank to cover the losses which may occur in the near future (APRA, 2012). In the process of implementation of the Basel III requirements, the APRA detailed that the Australia Deposit taking institutions is not in the need of having the extended transition arrangements. Rather Australia has the capital in excess of the minimum capital requirements in the year of two thousand and thirteen and made it possible very easily to meet the minimum capital requirements for the year ending two thousand and sixteen (BCBS, 2017). This has been achieved by Australia only because of the approach that it has been following from the date of its inception. It is very difficult to believe that in spite of having the global financial crisis Australia has been able to finance the amount in the year of two thousand eight and nine and to earn more than the required profits which have helped them to meet the minimum capital requirement.

• Management of the Capital framework – new buffer known as the counter cycle buffer has been introduced which has increase the regulatory requirement for the banks the breach of which can lead to heavy penalty which earlier was not there (RBA, 2013).
• Investor satisfaction – There will be challenge for the industry to convince the investors that there will be low return on equity and that too will be compensated by the increase in the safety of banks (Huang, 2011).  

Banking System In China

In case of the banking system being adopted and followed by the China, it has been observed that the major banks in this country have already met the condition of the capital adequacy requirements as provided in the Basel III. The capital adequacy ratio of all the major banks in China has reached the core adequacy ratio of 7.5% and all are above the ratio of 10%. The bank includes the bank of China, Agricultural bank of China, Industrial and Commercial Bank of China and China Construction Bank and Bank of Communications (Ma, 2011).

First challenge that is being faced by the bank is that capital management problem still exists in the banks. It is because of the fact that some deduction which is required to be made in accordance with banking norms have not been made, instruments of debt of the banks are unqualified (Zou, 2012). Along with this, the other challenge is that of the dependent of the China banks majorly on the interest income.

The main regulator of the banking Industry in India is Reserve Bank of India. The inherent factor that is again present in the Indian banking industry is the conservative approach that the RBI has adopted in regard to the banking norms against as suggested by the Basel Committee. The following figure describes the conservatism of the RBI in adopting the Basel III rules and regulations.

Particulars Basel III – BCBS Basel III – RBI

i)Minimum Common Equity Tier 1 4.50% 5.50%

ii)Leverage Ratio 3.00% 4.50%

iii) Minimum Total Capital plus 10.50% 11.50%

Conservation Buffer

 The above figure demonstrates the conservatism of the Reserve bank of India in regulating the banking industry (Shakdwipee, 2017).

The first challenge that will be faced by the banking industry is that with the increase in the working capital requirement of the banks, the cost of capital in terms of the respected weights will be increased. Due to this increase in the cost of the capital, the banks will tend to lend the amount at the higher rates and thus in turn leading to very less growth in the credit business of the banks. Third challenge will be the capital crunch as the Government will no more infuse much capital funds as it did earlier due to which credit business will be contracted. The fourth challenge that the Indian banking industry will face is of the operational issues that the banks required in order to improve their policy of the efficient management of the risk. It will include training of the staff and the officials of the bank (Ba, 2010).

Banking System In India

Thus, in this manner, due to the inherent differences, each banking industry will face the challenges in the implication of the Basel III.  

For the purpose of the report, following banks have been chosen from the respective banking industry. These are as follows:

• From the banking industry of Australia – West Pac
• From the banking industry of China – Bank of China
• From the banking industry of India – State Bank of India

West Pac – They are already in line with the requirements as provided by the Basel III regulations. Along with the other banks, west Pac is one of the bank which during the time of the global financial crisis that has occurred during the period from two thousand and seven till two thousand and nine have obtained the finance. It is basically due to the high profits that the bank has already been maintaining over the years and the capital ratio that it has been updating every year in regard to the changes in the environment conditions. Due to this proactive approach, the banking industry in Australia will not face much difficulty in maintaining the Basel III requirements as the regulatory authority APRA itself adopts approach which is more in consonance with the Basel framework (PWC, 2014).

Bank of China – The major change that the bank of china has taken to meet the requirements of the Basel III standard is that the bank in any manner promote the adjustment of the capital structure and strengthen the management of the capital. In other words, the bank will manage the assets and liabilities and that too with the risk of tolerance and the profit growth. It is because only by managing the assets and liabilities of the bank, the bank will be able to achieve the adequate capital adequacy ratio and the leverage ratio (Xiao, 2011). If the profit model is not undertaken then the bank will be in the situation that the bank will collapse. It is because bank of china majorly depends upon the interest income and if the interest income is not looked after on the regular basis then there will be soon closure of bank. Thus, in this manner, bank of China will meet the Basel III requirements.

State Bank of India – The major step that the state bank of India will undertake is that it will train their employees and the officers of the company regarding the Basel III requirements and the condition and describes as to how the same shall be adopted and followed in the given situation. Although the banks have already followed the RBI guidelines which is more conservative and is more or less equivalent to the Basel III requirements, but there may be the chances that the capital of the bank wipe out in few weeks as happened recently in the Punjab National Bank (Swamy, 2016). With this fraud, the RBI will have to look more in the internal controls as the Basel III requirements and adoption will fail if the bank does not have the adequate internal control system framework.       

Conclusion

Basel III, as given by Basel Committee, acts as the reporting and the regulatory framework which governs the banking industry of all the countries which are the member of the Basel Committee on Banking Supervision. The three banking industry located in Australia, China and India have been considered. At first their current reporting framework has been discussed in relation to the challenges which they will face to adopt the Basel III requirements. Then the particular bank of each country has been chosen so as to discuss how the banking industry will meet the Basel III requirements. In order to conclude the report, the banking industry in Australia will face fewer challenges than the other two countries in adopting the Basel III regulatory framework in true spirit.   

References

APRA (2012),‘The impact of the Basel III Capital Reforms in Australia’, APRA Insight, Issue 2, pp 32–59.

Ba S., (2010), “Capital regulation procession under the Basel III Accord” , Journal of Western Discussions, No. 10, pp. 50–53.

BCBS, (2017), “Basel III : International regulatory Framework for banks”, available on https://www.bis.org/bcbs/basel3.htm?m=3%7C14%7C572  accessed on 25-04-2018.

Huang H., (2011) “Cost Analysis of the Basel ? Accord”, Journal of Economic Issues No. 12, pp. 91–95.

Ma Z., (2011), “The Basel ? Accord and the change of indicators of Chinese Banks’ regulation”,  Journal of China Rural Finance, No. 4, pp. 44–46.

PWC, (2014), “Basel III : An Australian Prospective on a Global challenge”, PWC Journal, Issue 101, pp 12-17.

RBA, (2013), “ The Basel III capital Reforms in Australia”, Financial Stability Review, Issue 24, pp 42-55

Shakdwipee P, (2017), “Impact of Basel III on Indian Banks”, World Journal of Research and Review”, Vol 4, pp 40-45

Swamy V, (2016), “Basel III: Implications For Indian Banking”, available on https://www.iibf.org.in/documents/reseach-report/Report-25.pdf   accessed on 25-04-2018.

Xiao W. (2011),  “Analysis of the Basel III Accord’s impact and China bank’s accomplishment” Journal of Financial Theory, No. 8, p. 18.

Zou Y, (2012), “Basel III and its implementation in china’s Banking Industry”  available on https://publishup.uni-potsdam.de/opus4-ubp/frontdoor/deliver/index/docId/6635/file/EFC_Yasheng_Zou_43_54.pdf  accessed on 25-04/2018.