SINGAPORE — Amid muted economic growth and low interest rates, Singapore banks are watching the so-called Basel IV standard with concern, as the proposed new rules are expected to further increase their capital requirements that will undermine profitability, as well as impose new restrictions on how the lenders assess the riskiness of their loans and account for operational risks.

While Basel III — the global regulatory framework on bank capital requirements, stress testing and liquidity risk — is still being implemented with a deadline of 2019, bankers have dubbed the new proposals and suggested changes to the current set of rules Basel IV. These are expected to translate into more costs and tighter regulatory requirements, causing worry and uncertainty for the already beleaguered banking sector.

“The Basel IV recommendations are very onerous. If they go through in their current form, the banking sector globally has to add as much capital as it has already added in the last five years,” Mr Piyush Gupta, Group CEO of DBS Bank told TODAY.

“I don’t expect them to be approved in their current form. I do think they will be modified substantially, but even after that, there is lot of incremental regulatory pain ahead of us.”

Besides increased capital holding by banks so they may better absorb losses, the key components of Basel IV include restrictions on the way banks calculate risk-weighted assets (RWAs), said banking experts.

Basel IV also proposes to modify the ways banks calculate operational risk, such as those from cyber-crimes and IT glitches, by using a standardised approach set by global regulators instead of allowing banks to use their own models.

“Some of the latest Basel Committee proposals on further adjusting the capital rules can potentially lead to additional significant increases in overall capital requirements, which we understand is not the committee’s intention. We have expressed this feedback as part of industry consultations by the committee. At the same time, we provided suggestions to consider other potentially unintended consequences of the proposed adjustments, including those on the real economy,” said Mr Vincent Choo, chief risk officer at OCBC Bank.

Regardless, the Republic’s three banks stand among the strongest in the world, underlining their hefty capital buffers and sound risk management practices.

Mr Jimmy Koh, head of investor relations and research at UOB, said: “The risk weighting of assets will most likely increase under Basel IV ... Our capital position is sound and recognised as a key rating strength by credit agencies. UOB, being a Singapore bank, has always adhered to stricter capital standards, and the anticipated future regulatory changes have been an important consideration for us in capital planning.”

Recently, Mr Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), also warned against raising the overall capital requirements for banks excessively through certain risk calibrations currently being weighed by the Basel committee as it works to fine-tune Basel III capital rules. The regulations should not unduly penalise lending to key sectors such as trade and small-and-medium enterprises, he said.

“While the availability and cost of trade finance have so far held up well in the face of Basel III implementation, the latest set of proposals could have the effect of discouraging banks from trade financing. This is not what we need at a time when trade is growing more slowly than income in many parts of the world … In trying to get the micro calibrations right, we must not end up getting the macro settings wrong. We must guard against these unintended outcomes,” said Mr Menon in his keynote address last week at a symposium on Asian banking and finance in San Francisco.

Regulators are not in the business of ensuring profits for banks but have an interest in their profitability because the lenders need to be profitable in order to be strong and able to support the real economy, he added.

“We have already achieved more or less the right level of capitalisation for the banking industry through the initial set of Basel III reforms after the financial crisis,” said Mr Menon.

However, according to Mr Chris Matten, Asia Pacific financial services risk assurance leader at business consultancy PriceWaterhouseCoopers, talk of Basel IV is overdone given the number of amendments and modifications Basel I, Basel II and Basel III have gone through.

“The new regime for market risk is unlikely to have a material impact on local banks. The banks do not run large market-risk exposures,” said Mr Matten. “For credit risk, we have to note that (a) the proposals are still at the consultation stage and (b) the impact on any individual institution will depend on the parameters currently used in their internal ratings models.”