Be very afraid of Basel III | Bangkok Post: opinion

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Be very afraid of Basel III

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  • Newspaper section: News
  • Writer: Sutapa Amornvivat
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Who's afraid of Basel III? I am, and you should be too, because starting January 2013, tougher banking rules known as "Basel III" are expected to take effect. But why should we care? After all, Thailand is not a member of the Basel Committee, and aren't these rules supposed to have an impact on just banking operations anyway? 

The Thai regulator does not need to adopt Basel III, but it can choose to do so, as it did with Basel I and II. The Bank of Thailand adopted the previous Basel rules to upgrade bank risk management practices to match international standards. Therefore, in the short term, it is the banking sector that will suffer most from stricter supervision. And the markets know this; when the Indian banking regulator announced last May they will embrace the new rules, followed by the Chinese regulator just last week, their banking stocks immediately tumbled. But what about the long-term impact? It may come as a surprise, but the changes could affect the well-being of your business. The long-term impact of the new rules is two-fold, but first, let's start with what exactly Basel III is.

Similar to the first two iterations, this third installment requires banks to hold higher levels of quality capital such as retained earnings and common shares, in order to sustain unexpected losses in a market downturn. Banks running short of capital can boost it either by lowering dividend payout or by raising funds in the capital markets. But unlike in Basel I and II, banks are now asked to hold a capital cushion called a "buffer" as a safeguard against a repeat of a Lehman Brothers collapse. Beyond that, Basel III introduces new features called liquidity and leverage tests. These new tests are there to make sure banks are not stressing their balance sheets with loans and investments without having adequate deposits and capital, technically preventing banks from biting off more than they can chew.

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