Asian banks face Basel requirements - Update - Basel Committee on Banking Supervision

Internal Auditor, Oct, 2003 by T. McCollum

LAWMAKERS AND regulators in China, India, and Pakistan issued guidelines and regulations in August to bring banks in line with internationally recognized bank supervision and risk management recommendations of the Basel Committee on Banking Supervision. The Basel Committee was established by the central banks of 10 leading economic nations to provide bank supervisory standards, guidelines, and best practices.

Members of China's National People's Congress (NPC) Standing Committee discussed a draft law that would require the nation's commercial banks to adopt many of the banking supervision rules set forth in the Basel Core Principles for Effective Banking Supervision. The draft law would require the China Banking Regulatory Commission (CBRC) to establish banking guidelines for minimizing financial risks and work with banking regulators in other nations to supervise cross-border banking activities.

Critics of the draft law say it does not include sufficient detail about how the CBRC will minimize financial risks, nor does it establish oversight of CBRC operations. The CBRC was established last April to oversee China's banks.

In India, regulators issued draft guidelines requiring banks to comply with the New Basel Capital Accord risk management recommendations. Under the proposed guidelines, The Reserve Bank of India (RBI) would require the nation's banks to put a capital charge on each asset in their investment portfolio based on the asset's individual risk. Currently, banks set capital charges at a uniform 2.5 percent rate, regardless of the individual risk.

The RBI draft guidelines are expected to reduce the amount of capital individual banks hold to support loans because they would have to calculate capital needed based on the capital charge for both credit and market risk. Critics say this will hurt banks' risk-taking capability.

The State Bank of Pakistan (SBP) also issued risk management guidelines for banks in preparation for implementing the New Basel Capital Accord in Pakistan. The guidelines outline best practices that banks should follow to assess and manage the risk of their loan portfolios.

The SBP guidelines are intended to give Pakistani banks a framework for managing risk and are not intended to serve as enforceable regulations at this time. However, banks are expected to provide twice-yearly progress reports on implementing the guidelines, and the guidelines will become enforceable after Pakistan adopts the New Basel Capital Accord.