Looking beyond Basel III

Author: | Published: 1 Aug 2012
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Korea is in a transition period of complying with various global financial standards. As a result of the 2008 financial crisis, the Basel committee put forward the Basel III framework, which strengthens the pillars that formed the previous Basel II regime. Basel III is designed to enhance minimum capital and liquidity requirements, the supervisory review process for risk management and capital planning, as well as risk disclosure and market discipline. Korea has proven its commitment to complying with these standards through regulatory adjustments and monitoring, but further measures may be needed.

The Financial Supervisory Service has been encouraging banks to retain more capital, especially foreign-currency, for fear of unstable financial markets. A compliance officer at Shinhan Bank notes that "Korea has been well prepared for the Basel III implementation for a long time. Korea is a very competitive market with thin margins and increased equity." The enhanced minimum capital and liquidity requirements of Basel III are the crux of the new framework, but Korean banks have so far performed well in meeting these standards. "Ever since the first significant financial crisis Korea weathered in 1997, the financial sector has already been up to speed. It has long prepared financial institutions' commitment to cash reserve, for reasons such as crisis preparation and regulations," he says.

Some market observers believe the Basel III requirements have affected the investment market. Basel III imposes increased capital requirements and stricter regulations on banks, which limit the available funds for projects, so it has a profound impact on Korea as its businesses are investing all over the world. However, this has allowed for diversified transactions and is also expected to open up niche markets, such as a market for project bonds to finance these projects.

Woo Young Jung, head of banking and finance at Lee & Ko, explains the significance of Basel III from a legal perspective: "We will soon see an incredible effect on lawyers. The interpretation of Basel III is focused on the regulatory side, and how exactly we interpret this is the key issue."

Basel III comes into full effect on January 1 2013, and the Financial Services commission has amended the Presidential Decree of the Bank Act to change the scope of interpreting the Tier 1 and Tier 2 capital which form a bank's equity capital. This amendment comes into effect on the same date. The FSS has been making efforts to conduct financial health testing for major banks, and has actively raised capital holdings of banks to meet the Basel III requirements.

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