Lessons of crisis reflected in standards
Lam will offer insights and information about the new rules at a November 23 seminar, "Basel III: New Rules for Bankers", co-organised by Kornerstone and Classified Post.
"These new regulatory requirements are driven by the crisis which [exposed] a lot of loopholes or gaps in the rules governing major financial institutions," he says. "We need to learn from our mistakes to make sure we don't repeat them. The key lessons are reflected in Basel III."
This designation, he explains, is shorthand for the third major review of international regulations undertaken by the Basel Committee on Banking Supervision (BCBS) and is part of a continuing process involving industry regulators and, where necessary, consultations with representatives from major banks, usually those based in Europe and North America.
The global crisis added impetus to the most recent round of talks. The result is that legislation, guidelines and practices will change in significant ways that banking or finance professionals cannot ignore.
Lam says the measures announced in September focus on strengthening global capital standards. They call for a stronger definition of capital, higher minimum requirements for common equity, and a new proposal for counter-cyclical buffers. The seminar will address these issues and other pressing topics, such as additional capital surcharges for systemic banks and moves towards a global liquidity standard.
"The main aim of the conference is to disseminate the latest information, so that participants can be ahead of the curve," says Lam, who has worked for Citibank, GE Capital and HSBC, and has extensive experience in regulation and risk management. "For example, we will look at how banks should monitor liquidity through coverage ratios and stable funding, and will drill down to understand how all the main things will change the business landscape and the business models of banks."
He says it seems inevitable that higher capital requirements and tighter definitions will impact profitability. The sales and trading of products, such as over-the-counter derivatives, may be "severely" affected, he says, and other leveraged instruments that rely on the snowball effect of underlying financial products are also likely to be hit. "Some banks with a bigger share in the capital markets may be able to work around this, but you will find changes [taking place]," Lam says. "There are interesting times coming up."
At the seminar, he will define systemically important banks and talk about how and where regulators are applying more buffers. Lam says it appears that if banks can't meet the tighter capital ratios or go down to an undesirable level, regulators may stop them from making mistakes, such as paying big bonuses or taking excessive risks.
While the new developments may seem stringent, they are optional, Lam says. However, in Hong Kong and on the mainland, regulators will expect all top banks to take steps to be in compliance.
"There will be a huge [negative] reputational factor if you are not compliant," Lam says. "A lot of the biggest banks in Hong Kong are international and, therefore, formally regulated from a home base overseas. There is some discretion and not everyone will apply Basel III in the same way because they will adapt the regulations based on their own needs. But it is important to know the principles and be ready to apply them."
Lam says the seminar will be relevant for everyone from CFOs to risk managers, bankers and equity analysts. "From a strategic point of view, they will all need to know about these changes," Lam says.
Date November 23
Time 2pm to 5pm
Venue Cliftons, 33/F, 9 Queen's Road Central
Fees HK$1,170 standard rate; HK$870 early rate (until November 12)
Stress-testing is now mandatory
Peter Lam will spend a fair part of the conference on "Basel III: New Rules for Bankers", discussing the need for stress-testing in financial institutions.
His expertise comes from advising a host of big banks and from recent dealings with Britain's Financial Services Authority (FSA), as he helped to steer RBS and Lloyd's through the worst of the crisis.
"We will certainly talk about best practices in stress-testing and remind people that this is no longer optional," says Lam, who is director of risk management for KPMG in Hong Kong.
Because of the financial crisis, he points out, regulators and board members require institutions to run formal stress-testing as part of their strategies for capital planning and liquidity management.
This makes it essential to have an integrated bank-wide approach and, where necessary, to apply reverse stress-testing, and check internal procedures and systems from different angles and probe for weaknesses.
"Understanding the possible implications is a vital step to sound risk management," Lam says.
He adds that there is still a debate on how reliable the recommended practices really are for identifying and analysing risks.
Indeed, some would argue - looking back to the events of 2008 and their origins - that simply following an agreed set of procedures is no guarantee of spotting potential hazard.
Lam hopes, though, that different ideas and viewpoints will lead to a dynamic exchange during this session of the conference, with participants being encouraged to jump in with relevant questions.
He notes that no one expects Basel III to provide all the answers to the problems that have afflicted the world of banking over the past couple of years. However, it does represent a significant step forward.
"Basically, Basel III is a set of rules and handbooks for banks; some things will not fundamentally change," he says. "People will still take risks and come up with new financial instruments, but it is a good starting point to address the loopholes and will give a framework for management to work in a more risk-oriented way."