Hong Kong banks on their own in Basel III

Hong Kong banks will have to turn to local fund-raising strategies to meet Basel III’s tougher liquidity requirements.

KPMG's 24th annual Hong Kong bank survey said that in order to meet Basel III liquidity coverage ratio (LCR) requirements, Hong Kong’s banks will need to focus on local strategies to raise funding as Asia’s regulators are more domestically focused.

Paul McSheaffrey, partner at KPMG China, said that the survey’s findings showed decelerating banking activity with an uncertain outlook in the near term. In particular, the survey results highlighted the pressures banks face in meeting new liquidity regulations of Basel III.

McSheaffrey said one of the issues facing Hong Kong's banking sector is its ability to raise liquidity in one jurisdiction and transfer it to another. This is likely to be constrained, he said.

"We have seen an element of (these constraints) already so banks will have to look to a local strategy," said McSheaffrey. "There might be the interbank market for term funding but there's only so much capacity and demand for that."

The prospect of de-globalization as global banks retreat from certain business areas due to rising costs brought on by regulation and protectionism is becoming a key issue, particularly with regard to the fragmented regulatory environment across Asia.

Further restricting room for manoeuvre for Hong Kong's banks is the current lack of available high-quality capital, according to KPMG's survey.

"There just isn't enough availability of high-quality liquid assets, required as part of the LCR to be introduced," said McSheaffrey "There is not enough cash, balances with the central bank, the HKMA and, in particular government debt, to satisfy all of the banks' requirements."

The Hong Kong Monetary Authority (HKMA) will begin rolling out implementation of the Basel III guidelines from January 2013, with full adherence scheduled by January 2019.

As part of the requirements, banks within the regulator's jurisdiction will be required to hold enough liquidity to survive a 30-day period of extreme stress, or the LCR, a requirement currently scheduled for implementation by January 2015.