Basel II norms to strengthen bond mart

Standard & Poor's today said implementation of Basel II capital adequacy norms by banks in the Asia-Pacific region is likely to heighten disintermediation by the corporate sector. This in turn will aid the development of the regional corporate bond markets.

"With higher capital charges for higher risk, the main implication for borrowers in the Asia-Pacific region is that banks will gravitate to lower risk assets, unless they are adequately compensated for the higher risk," said the global rating agency's credit analyst, Ian Thompson.

He was speaking on the sidelines of an Asian Development Bank meeting in Istanbul.

The implementation of Basel II may lead to some liquidity consequences "" access to liquidity for lower risk enterprises and banks may improve, while higher risk enterprises may face tightened access to liquidity and credit, given the higher capital charges such exposures entail under Basel II.

Higher risk banks may face a reduced ability to tap interbank markets, or increased pricing to compensate for the need for their counterparties to hold more capital against the higher risk exposure, Thompson said.

"As for the impact on credit ratings, lower rated banks with asset quality, capital, and risk management challenges could be rewarded with higher ratings over time, should the implementation of Basel II lead to recapitalization and enhanced risk management systems and culture," he added.

The other likely outcomes as banks adopt the Basel II capital accord framework include improved measures to price risk, investments in risk management systems, technology and expertise, improved capital allocation and recapitalisation of weaker banks.