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IMPROVED RISK management is the most important aspect for Asia of the Basel II framework, and moving forward gradually and properly is key to its successful implementation, a seminar was told today.

The seminar on Challenges and Implications of Basel II for Asia discussed the general challenges and implications for Asia of the new international capital framework for banks. The new framework, commonly called Basel II, will come into effect in general in 2007, but the timetable in Asia varies from country to country participants learned.

The meeting was the first of the Seminar Series at the ADB Annual Meeting taking place 3-6 May in Hyderabad.

There are many challenges associated with the implementation of the new and more complex framework, but Karl Cordewener, Deputy Secretary General of the Basel Committee of Banking Supervision, pointed out that “the main objectives of improved risk management and adequate capital in relation to risk are important to all banks.”

He added that the new framework offers national discretion in many areas and it is up to each country to determine the pace of implementation.

Governor Yaga V. Reddy of the Reserve Bank of India illustrated the challenges of the new framework for emerging and developing countries by noting that while more than 100 countries have adopted the old framework, Basel I, assessments in 71 countries show that 37% have not fully complied with it, which is considered necessary for moving on to Basel II.

He further noted that the trend expected in Asia is for countries with a large number of foreign banks, such as Hong Kong, China and Singapore, to introduce the more advanced approaches under Basel II sooner, whereas countries, such as India, which has a small share of foreign banks, will start with the standardized approach and gradually move towards a more complex framework.

“India has adopted a gradual approach to harmonizing its regulations with global standards since 1992, and will continue to do so with a three-track approach for Basel II for the different types of banks,” Mr. Reddy said.

The People’s Republic of China will likewise adopt a gradual approach, said Assistant Chairman Wang Huaqing of the China Banking Regulatory Commission. While large internationally active banks have until 2010 to comply with the internal risk management procedures required, Mr. Wang noted that the PRC already defines sovereign risk weights according to Basel II rules instead of Basel I. He emphasized that the new framework is more about enhanced risk management than capital regulation.

This view is shared by Bank of Thailand Assistant Governor Krirk Vanikkul, who also noted that it will take time to build risk management capacity to effectively implement the complex new framework. Thailand will start with the standardized approach and, over time, move to full implementation.

Asa Malmstrom-Rognes is an ADB Senior Financial Economist.

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