Fitch Ratings is encouraging Asian banking regulators to set higher capital requirements than those recommended by the Basel II committee where appropriate.

In a special report on the implementation of Basel II in Asia, Fitch continues to urge bank supervisors to set higher capital requirements than the recommendations from the Basel II committee where appropriate, either for whole systems or for individual banks. But the agency expects most Asian supervisors will be reluctant to set higher capital ratios for individual banks on the basis of what the supervisors perceive to be a higher risk profile, preferring a more formal rules-based approach.

The new report is an update to its first study on the topic issued in January 2005, where Fitch questioned whether the assumptions behind Basel II and recommended risk weightings for certain asset classes, were as appropriate for emerging markets as for more developed economies. The rating agency says it finds that some consideration has been given to these local realities, however it notes that this has not been consistently done, in part because supervisors have at times been reluctant to impose higher capital requirements on their banks as this may place them at a competitive disadvantage vs international peers.

Fitch says it believes that in the more developed Asian economies, banks can expect some capital relief, especially if they apply IRB approach: “This may give them a competitive advantage over banks on the standardized approach, especially for very high quality lending such as residential mortgages, where already strong competition is likely to intensify.” However, in emerging Asia capital requirements may increase under IRB, as would be expected if IRB is more risk-sensitive, which may give a relative advantage to banks on the standardized approach and may slow their transition to IRB.