The Importance of Basel III for the Future of Banking Industry in Singapore

The Basel Committee on Banking Supervision (BCBS) implemented the Basel III following the global financial crisis. The aim was to foster a global banking system that would be more resilient than the current one. Several measures were made including the need to have banks raise the quantity and quality of a buffer, a capital amount held by the bank to prevent shock from unanticipated losses (Yao, 2016). Complying with Basel III, it has been said to improve the efficiency of the banking system by mitigating the potential hostile impact of financial crises. The move aims at enhancing a stable and more resilient banking system. Such a system is primarily for a sustainable economic efficiency and financial stability, which are essential in a global financial system (Underhill & Zhang, 2008). In this study, we will look at some of the potential importance of Basel III framework in credit information for the future of banking sector in Singapore.

Firstly, implementation of the Basel III will ensure that Singapore banks hold adequate liquidity buffers and cover other cash obligations (Bordeleau & Graham, 2010). Therefore, the banking system will be in a position to absorb any possible credit losses. Further, it will be important in ensuring that potential weaknesses in the banking sector do not overflow to other financial systems affecting other services such as credit availability and the country's economy. For instance, during the severe phases of the global financial crises, the solvency and liquidity of many banking institutions were widely affected (Bindseil & Lamoot, 2011).

Notably, there was an instantaneous effect of the crises on banks, financial systems, and economies. The crisis also affected many other nations around the world. However, in these countries, there were less direct transmission channels, and the cross-border credit availability was mostly contracted. The previous and the recent financial crises covered a wide scope and were rapid around the world. Since we cannot predict the future crisis, implementation of the Basel III will be important in increasing banking sectors, resilience in Singapore against shocks either internally or externally (Moreno & Villar, 2005).

Accordingly, Basel III presents adequate measure in setting capital demands for counterparty credit exposures resulting from banks' derivatives and various financial activities (Pykhtin & Zhu, 2006). The reforms will go a long way in raising the buffers on capital backing such exposures. Additionally, this will decline procyclicality and boost incentives to move OTC resultant contracts to central counterparties (Gregory, 2010). The move would help cut systemic risk across Singapore's financial system. The reforms will also offer incentives strengthening the risk management of the counterparty credit exposures.

As noted over the financial crisis period, the banking sectors can suffer massive losses during a downturn followed by a period of excess credit growth. Such losses can potentially, bringing about or worsening recession in the actual economy (Elliott, 2017). This would consequently cause banking sector destabilization. The Basel III framework highlights the specific importance derived from the banking industry raising its capital defenses when credit has grown to excessive levels. According to Backé, Égert, and Walko (2007), the buildup of the defenses will offer the additional benefit helping in moderating excess growth of credit the Singapore banking sector.

Finally, Hannoun (2010) observes that the framework plays a significant role in enhancing the quality of a capital base. The move is important noting the importance of risk exposures to banks including credit losses being back by a capital base of high quality. Furthermore, Basel III framework requires the banks to address excess credit growth set at zero in average times and only increased over periods when credit availability is in excess (Kaminsky, Reinhart, & Végh, 2004). However, even in the absence of a credit bubble, the banking sector is expected to build an above the minimum buffer that will protect the banking sector in Singapore from plausibly severe shocks emanating from varied sources.

In conclusion, the Basel II framework was in response to the global financial crises and aimed to have the banking sector become more resilient to the unpredictable future. By implementing this framework, the banking industry in Singapore will in future be reaping some importance especially in line with the credit aspects. Firstly, the banks will have sufficient liquidity buffers, enabling the banking system to absorb any likely credit losses arising from financial crises. Secondly, Basel III will help in increasing the resilience of the banking sectors in Singapore against shocks either internally or externally.

Further, the reforms would help cut systemic risk across Singapore's financial system and offer incentives that strengthen risk management in counterparty credit exposures. Moreover, the banking sector will be protected against huge losses that can potentially destabilize the banking sector and cause or worsening the country's economy. Finally, the framework will help raise the capital base quality needed in backing up the credit losses. The banking sector is expected to build a buffer above the minimum even in the absence of a credit bubble; this protects the banking industry from possible shocks from many sources.

References

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Bindseil, U., & Lamoot, J. (2011). The Basel III framework for liquidity standards and monetary policy implementation. Berlin: European Central Bank.
Bordeleau, É. & Graham, C. (2010). The impact of liquidity on bank profitability (No. 2010, 38). Ottawa, Ontario: Bank of Canada.
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Gregory, J. (2010). Counterparty credit risk: The new challenge for global financial markets (Vol. 470). New York, NY: John Wiley & Sons.
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Yao, W. (2016, November 23). Why Asian banks are well positioned for Basel III. Retrieved from http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/why-asian-banks-are-well-positioned-for-basel-iii/