Global regulators have proposed new liquidity and capital rules, known as Basel III, with the goal of reducing the likelihood of another financial crisis. These regulations will affect European and North American banks far more than their Asian counterparts, for three main reasons.
First, following the Asian crisis in the late 90s, many Asian regulators have already imposed tougher capital requirements than Basel III. Secondly, higher savings rates and a more conservative customer attitude towards debt have created lower loan-to-deposit ratios in most Asian economies.
Finally, Asian banking products are less complex and less risky, thereby requiring less capital. From the outset, leading Asian banks are generally closer to compliance with Basel III – standards to which most Asian regulators have committed (even though some of them have not yet implemented Basel II).
By contrast, most Western banks are now working through the implications of Basel III for their business. Their greater reliance on wholesale funding, more off balance sheet activities and higher levels of leverage means that many will need to restructure, a few even radically, to remain viable.
For example, corporate banks whose profits have historically depended on cross-selling derivatives to corporate borrowers have had to rethink their strategies given the increased capital charges for OTC derivatives.
Asian banks are now in an advantageous position during this period of regulatory change and global uncertainty. We see a multitude of opportunities, both domestically and regionally. However, capitalising on some of them will require capabilities that many Asian banks currently lack.
In such cases Asian banks could benefit from partnerships with Western institutions that are liquidity- and capital-constrained but have more sophisticated products, infrastructure and talent.
Figure 1: Strategic framework for Asian banks
A common thread across all four strategic pathways is the need for Asian banks to upgrade their capabilities and operating models. The challenge lies in translating strategic intent into action. Our approach to reaching congruence across strategy, capabilities and operating model, which we have applied for clients across the globe, is shown below:
For example, an Asian bank that wants to offer structured trade financing solutions to its domestic clients could partner with a bank that has strong advisory capabilities in that area but lacks the financial resources or local presence.
This requires improved customer understanding, more sophisticated credit and portfolio management, and the ability to identify and work with external partners. These capabilities must then be built into the operating model, with clearly defined governance, processes, and roles and responsibilities.
These are exciting times for Asian banks, with potentially great prizes for those that are swift and decisive in action.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Christian Edelmann is a Partner and Head of Oliver Wyman's Corporate & Institutional Banking.