Introduction
The Bank of International Settlements (BIS) is the representative of 60 central banks from around the world which holds the responsibility for about 95% of the world GDP. It was established in 1930 on the quest of being a trustee in connection, facilitating collaboration among the international financial institutions, and central banks. Especially on the issues of relevance for monetary and financial stability, their research and policy analysis on the Basel Committee on Banking Supervision sets a guideline for internationally active banks, such as Basel II and Basel III (Bis.org, n.d.). This paper will assess how and to which extent United Overseas Bank’s (UOB) treasury and risk management functions have been shaped by the Basel frameworks, specifically Basel II and Basel III.
Basel II and Basel III Frameworks
First of all, it is essential to discuss the overall purpose and key provisions of Basel II and Basel III frameworks in order to provide a more profound context for the further analysis of the UOB’s financial performance and compliance with Basel standards. As it was already mentioned, both documents were developed by the Basel Committee on Banking Supervision. Basel II was the results of the efforts of the committee towards the improvement and revision of the standards governing the capital adequacy of internationally active banks (“Basel II,” 2005). The original text was published in June 2004, but this paper references the updated version of November 2005 as it offers a more comprehensive and extensive version of the text.
Basel II offers diversified and complex guidelines, which are based on the calculation of minimum capital requirements (“Basel II,” 2005). Also, the document includes standardized and internal ratings-based approaches to credit risk management as well as the securitization framework for credit risk and the description of the supervisory review process (“Basel II,” 2005). According to the first principle of the supervisory review, “banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels” (“Basel II,” 2005, p. 163). This process includes five distinct aspects: board and senior management oversight, sound capital assessment, comprehensive assessment of risks, internal control review, as well as monitoring and reporting (“Basel II,” 2005). These principles will be helpful when analyzing the UOB’s compliance with Basel II standards.
Further, it is essential to discuss the Basel III framework. Originally published in December 2010 and updated in June 2011 (this report employs the updated version), this document represents the Basel Committee on Banking Supervision’s comprehensive response to the global financial crisis. Accordingly, the Basel III framework addresses several important shortcomings of its predecessor. The initial purpose of creating Basel III was to develop a set of guidelines that would help to build a resilient banking system, which would avoid systemic vulnerabilities and function effectively (“Basel III,” 2011). One of the most important aspects of this document is that it introduces Common Equity Tier 1 (CET1) guidelines for creating loss-absorbing capital. It is also possible to state that one of the major concerns of Basel III is the creation of efficient risk management instruments and measurements in their various forms since the document was developed as a response to the global financial crisis.
UOB’s Treasury and Risk Management Functions in the Context of the Basel Framework
The UOB’s Compliance with the Basel II Requirements in 2010
As this section is dedicated to the discussion of how the UOB’s financial performance and compliance with Basel standards have changed over time, it is essential to first observe the bank’s 2010 annual report in order to understand how it fulfilled the Basel II requirements. As it is stated in the report, UOB “adopted Basel II framework for its capital adequacy ratio computation” (“UOB annual report 2010”, 2010, p. 7). Basel II was used to achieve the goal of “capital efficient business growth along with risk-based pricing” (“UOB annual report 2010”, 2010, p. 24). In particular, Basel II Pillar 3 along with the Monetary Authority of Singapore (“MAS”) Notice 637 Public Disclosure were used to develop the bank’s risk profile and facilitate its treasury and risk management functions (“UOB annual report 2010”, 2010).
Concerning the financial outcomes, it is possible to mention the following. The index of capital adequacy ratio, which was adopted from the Basel II framework, was 19.8% in 2010 (“UOB annual report 2010”, 2010, p. 7). This measure exemplifies the substantial growth since 2006 when the index was 16.3% (“UOB annual report 2010”, 2010, p. 7). UOB’s “net profit after tax for 2010 grew 41.8% over 2009 to $2,696 million” (“UOB annual report 2010”, 2010, p. 58). Credit risk was managed under the combination of three approaches from Basel II: standardized, foundation internal ratings-based, and advanced internal ratings-based, which allows the bank to mitigate risks successfully. In general, it is possible to state that UOB has managed to comply with Basel standards successfully.
Changes in the UOB’s Financial Performance from 2011 to 2016
Further, it is of high importance to discuss how the bank’s financial measures changed and evolved from 2011 to 2016. Since Basel III was issued in 2010, and the period of time to change and meet the requirements is due 2019, it is highly significant to observe the UOB’s efforts to comply with the new framework. Total capital adequacy ratio (CAR) dropped in 2011 to 16.7% (“UOB annual report 2011”, 2011, p. 5). In 2012, the CAR index rose to 19.1% (“UOB annual report 2012”, 2012, p. 5). However, in the following years, the CAR index dropped again, and it was fluctuating around 16%, with 2015 being the year with the lowest index. The indexes for this period are as follows: 16.6%, 16,9%, 15.6%, and 16.2% for 2013, 2014, 2015, and 2015 respectively (“UOB annual report 2013”, 2013, p. 8; “UOB annual report 2014”, 2014, p. 8; “UOB annual report 2015”, 2015, p. 12; “UOB annual report 2016”, 2016, p. 22). Therefore, one can state that the global financial crisis affected the bank significantly.
It is also essential to notice that the UBO’s risk management instruments have improved over the identified period. Employing the Basel III risk management guidelines, the bank was able to create a more comprehensive and diversified risk management system. As the reports show, in 2011 the bank’s risk-weighted assets (including credit, market, and operational risks) were 133,578 million Singapore dollars, and in 2016 this measure was 215,559 million Singapore dollars (“UOB annual report 2011”, 2011, p. 44; “UOB annual report 2016”, 2016, p. 124). In general, the company has been improving its treasury and risk management instruments continuously.
The UOB’s Compliance with the Basel III Requirements in 2017
Finally, it is possible to assess the UOB’s overall compliance with the Basel III requirements as of 2017. As it is stated in the annual report, UOB has made significant progress in terms of implementing the Basel III framework (“UOB annual report 2017”, 2017). For example, as of the end of 2017, the bank’s leverage ratio was eight percent, which is “well above Basel’s minimum requirement of three percent” (“UOB annual report 2017”, 2017, p. 9). Treasury management functions also represented considerable progress as UOB did not buy back any shares in 2017 although the bank used 2.4 million treasury shares to meet its obligations under its employee long-term incentive plans, which allowed UOB to deliver long-term and sustainable returns (“UOB annual report 2017”, 2017).
Total capital adequacy ratio also showed considerable growth as compared to the previous year: in 2017 the CAR index was 18.7%, which is 2.5% growth (“UOB annual report 2017”, 2017, p. 24). Moreover, as it was mentioned in the previous subsection, risk management instrument improved significantly by the end of 2017. As it is mentioned in the report, the total liquidity coverage ratio for 2017 (full-year average) is 147%. This measure exemplifies the company’s robust corporate governance. The report mentions that since 2010 UOB’s Board of Directors has implemented numerous steps in order to facilitate its risk management department. In accordance with Basel III guidelines, a more comprehensive and diversified system of managing risk had been developed by the end of 2017 (“UOB annual report 2017”, 2017). In comparison with the implementation of Basel II, the Basel III framework was considerably more efficient.
Conclusion
In conclusion, it is essential to state that UOB represents an excellent example of a company that significantly and evidently benefits from the continuous implementation of Basel guidelines. This paper represents the analysis of the UOB’s annual reports as well as Basel II and Basel III frameworks and their peculiarities. The conducted analysis shows that UOB fulfilled the requirements for both Basel frameworks. However, the comparison of the bank’s financial measures from 2010 to 2017 reveals that the continuous implementation of Basel guidelines (particularly, Basel III) allows for resilient, substantial, and sustainable growth. The paper exemplified the fact that the financial crisis had a considerable impact on the bank’s performance. Thus, UOB had to reinforce its treasury and risk management functions in order to improve its financial outcomes. In overall, the Basel III framework appears to be the most efficient method for achieving financial stability and improve primary performance indicators such as capital adequacy ratio and return on equity.
References
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Basel III: A global regulatory framework for more resilient banks and banking systems. (2011). Web.
Bis.org. (n.d.). Overview. Web.
UOB annual report 2010. (2010). Web.
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UOB annual report 2016. (2016). Web.
UOB annual report 2017. (2017). Web.