The competitive landscape in the banking industry should not be unduly affected by the implementation of Basel II in Hong Kong.
This week I would like to talk about how Basel II may affect the competitive position of different types of banks in the markets where they operate. There are two aspects to this. First, there are differences between domestic and foreign-owned banks, given that different jurisdictions may adopt different approaches to Basel II implementation. Second, there are differences between the banks adopting the more advanced approaches, which will tend to be the larger ones, and the banks adopting the less advanced approaches, which will tend to be the smaller ones.
Divergences in how different jurisdictions implement Basel II are inevitable. They have to take account of their own laws, economic and business environments and banking practices. But that makes it all the more important that there should be a high degree of alignment in the interpretation and application of the rules and, not least, in the timing of implementation. This is essential to avoid legal uncertainties for cross-border banking groups and any unnecessary implementation costs or competitive disadvantage during the transition period. This obviously requires co-operation among supervisors and a high level of communication between 'home' and 'host' supervisors (that is, supervisors in an institution's home jurisdiction and other places where it operates) in particular.
There are some complex cross-border co-ordination issues to be resolved and a number of home supervisors have instituted bilateral and multi-lateral implementation forums for international banks. The broad principles of co-operation between home and host supervisors, validation approaches, supervisory examination schedules and the division of labour among supervisors have been discussed. We at the HKMA are fully committed to playing our part in this and related processes to ensure that the level playing field is maintained and institutions are not disadvantaged by differences in supervisory practices and approaches. The HKMA has been liaising closely with the major international banks active in Hong Kong on their implementation plans in an effort to build sufficient flexibility into our rules to allow them as much as possible to follow the rules set by their home supervisors, to the extent that this can be done without compromising the level playing field within Hong Kong itself.
We are also well aware of the concern in the banking industry that particular types or sizes of institutions could be competitively disadvantaged. As I mentioned last week, we have introduced a Basic Approach for smaller institutions to ensure that there is an approach to Basel II tailored to the needs of every authorized institution, large or small. This is significant, because it means that in Hong Kong, as for example in the EU, all authorized institutions will migrate to Basel II, and so we will not have a situation where some institutions are operating under Basel II and some under Basel I, which could reflect unfavourably on the latter, and possibly affect their standing and competitive position.
Whether the larger banks adopting the more advanced approaches, such as the Internal Ratings-Based (IRB) Approach, and the smaller banks using the less advanced approaches like the Standardised or Basic Approach will favour the larger banks competitively is another question. The argument would be, I suppose, that if a particular type of lending carries a lower capital charge under the IRB Approach than under the Standardised Approach, this could give the IRB bank an advantage on pricing. But I am not really sure how significant this will prove, given that the locally incorporated banks in Hong Kong already have a significant capital cushion above the regulatory minimum. In any case, in the real world, capital charges are not the only factor that drives pricing of bank services; competition, of which Hong Kong has plenty, is at least as important. There are also already wide differences in the costs of funds of institutions in terms of operating cost, bad debt charges and so on, so an additional difference in capital charges may not make too great a difference. We will have to wait and see on this, but it is certainly not the intention for Basel II to be a vehicle for changing the competitive landscape - rather, it is an opportunity to align regulatory capital requirements with the risks that institutions assume and how well those risks are managed.
Joseph Yam
10 November 2005
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