New debates over ways to make the global banking system a safer place are, ironically, making a lot of people nervous. But Asia's lenders are one group warranting remarkably little concern.
In the lead-up to the financial crisis, certain banks piled on too much debt and exposed themselves to excessive risk. Multiple taxpayer-funded bailouts later, regulators and politicians are turning their attention to how they can prevent the fiasco from recurring.
A draft proposal of new global standards for banking capitalization known as Basel 3 is the first serious stab at this task. Generally, it will require banks to hold more equity capital and maintain greater liquidity. There also is the Obama administration's proposal to restrict large commercial banks with a U.S. presence from engaging in significant proprietary trading and owning hedge funds or private-equity funds.
The Volcker rule, so called because of its support from former Federal Reserve Chairman Paul Volcker, faces opposition from Republicans and an uncertain future. And Basel 3 rules still could go through some changes. But already they are provoking anxiety.
As it is, the U.S. and U.K. are likely to experience a decline in credit in the next two years, says Paul Shulte, a strategist at Nomura Holdings. Banks facing tighter Basel 3 capital requirements will have even less money to lend, potentially causing a dangerous contraction. "You can't talk about rehabilitation until the patient is out of intensive care," he says.
Asian banks are remarkably free from such concerns. Most are well capitalized. And they are less dependent on wholesale funding— that is, borrowing from other lenders through what is called the interbank market.
Their business lines are very simple: They take deposits and make loans. Maybe they issue credit cards and extend trade credit. They don't issue many derivatives or trade much for their own account.
Most would never fall afoul of the Volcker rule if it somehow applied to them.
"The problems in Asia are obviously a lot less than in the Western world," says Simon Ho, a banking analyst at Citigroup Global Markets.
Asia's present virtue owes much to a sinful past. Reckless lending by Asian banks drove many to the brink when the 1997-98 financial crisis hit. In the dozen years since then, they have sharply reduced their debt levels, and regulators have gotten better at keeping them in line.
The picture in some parts of Asia is less rosy, notably Japan, where Basel 3 would be particularly unwelcome because of how it treats single-A-rated corporate bonds commonly held by the country's lenders.
Taiwan and Malaysia are potential problem markets, Mr. Ho notes, and possibly South Korea, in part for its reliance on wholesale funding—though all three still compare favorably with Europe or the U.K. if you look at Citigroup's projected average Tier 1 ratios under Basel 3.
China, where mountains of bad loans a decade ago led to a massive government bailout of its biggest banks, has become surprisingly aggressive at prudential regulation. To be sure, credit growth occasionally gets out of hand, as it did last year under government orders to prop up the economy. And the banks' levels of subordinated debt, a less-favored form of capital, worry some. Still, China's banking watchdog recently pushed some lenders to raise more equity capital, even though their current capital-adequacy ratios are high by global standards. That probably is to provide a buffer for a rise in bad-loan levels and future loan growth, but it also is because China's regulator prefers to be cautious.
China wants its capital-adequacy ratios "to be among highest in the world," Mr. Shulte says.
Write to Peter Stein at firstname.lastname@example.org