The Basel  BIS Review 3/2007  5  Committee has now decided to pay greater attention to give a standard definition for capital, hopefully before the implementation begins in 2008.  International Comparison Many countries have not tackled all these issues associated with Basel II, but there is notable progress; some slowly, some moderately and some at a faster phase. For example, the Development Bank of Singapore (DBS), the largest bank in Singapore and the 5th largest group in Hong Kong with universal banking, providing full range of products and services for consumer, small and medium enterprises, corporate banking, investment banking, fund management, trade finance, cash management, securities and treasuries has taken a keen interest over the last 2-3 years in meeting the Basel capital adequacy requirements and to implement the same in 2008. At present, it has a Tier I capital ratio of 10.1% and a total capital ratio of 14.1%. The main philosophy behind the DBS’s approach is a balanced and enlightened one based on the management of capital. The approach is led by the DBS’s board and senior management and it is embedded within business of a whole group. It is constantly reviewed by supervisors and communicated to the markets. The DBS group has implemented a large-scale Basel II governance structure at several levels which is a success factor.
This is particularly relevant when it comes to similar financial products that can be packaged as an insurance product, a banking product or a securities product as same business can be undertaken by either a bank, investment bank or an insurance company. A key implementation issue is how to delineate the double gearing and how to make available capital to deal with risks of both insurance and securities products. As far as the EU is concerned, the financial conglomerates directive has already been issued and they are expected to comply with them. USA’s umbrella supervisory provisions are included in the Graham Leach – Bliley Act. In Sri Lanka, we still have not come to terms in dealing with a consolidated or a group-wide financial conglomerate. X. Proper definition of capital  How do you identify new capital instruments such as hybrid capital and perpetual debentures? Should it be Tier I or Tier II? One needs to be cautious here as hybrid capital can disappear given its derivative nature. Currently, there is a wide disparity between the Basel II preparation processes in Europe, USA and Asia. The issue of treating hybrid capital is significant as many Asian banks are moving towards synthetic securitization in producing hybrid capital and exposing their portfolios to credit risks, especially when equity participation has been synthetically securitized.