Early in the crisis, all countries took initiatives to strengthen prudential regulation and supervision, bank governance, and market discipline. The nature and direction of these initiatives was similar in all countries: to bring domestic standards closer to internationally accepted practices. Preparations have also started for the eventual removal of the blanket guarantees. Initiatives have also been taken to improve prudential regulation and supervision of international creditors in their home countries.
Prudential Supervision
In the crisis countries, the autonomy of the supervisory authority has been strengthened. In Indonesia, a new central bank law, passed in May 1999, established independence for Bank Indonesia. Under the law, responsibility for supervision moves from Bank Indonesia to a new agency in 2002. In Korea, before the crisis, a proposal for a new autonomous supervisory authority met with considerable resistance, but after the crisis broke the legislature swiftly passed new legislation establishing such an autonomous body. More recently, additional powers for licensing and supervision have been transferred to the new authority. In Thailand, supervision has been strengthened and become more autonomous. The new Bank of Thailand and Financial Institutions Acts are being drafted to give the Bank of Thailand greater supervisory authority. These laws are expected by early 2000.
All countries have made efforts to upgrade their supervisory capacity and strengthen the powers of supervisors. Supervisory reporting by banks has been much improved, and countries are relying more on on-site examinations. Moreover, supervisors can now demand additional loan-loss provisioning from banks, corrective actions when problems are detected, and more support from banks’ external auditors. The use of memoranda of understanding to enhance the supervisory authorities’ ability to monitor and enforce compliance with prudential ratios and performance benchmarks of financial institutions has become common. Supervisors now have more power over entry of banks, supported by new fit-and-proper rules (in all countries, the policy generally is not to allow new entrants until the restructuring is over). Most of the countries have introduced procedures that will remove some earlier supervisory discretion that allowed them to waive compliance with regulations on a case-by-case basis, for example regarding loan concentration. To strengthen supervisors’ hands in dealing with problem institutions, mandatory “prompt corrective action” procedures have been or are being introduced for situations where capital adequacy falls below certain trigger points.
Prudential Regulation
Regulations concerning loan classification, provisioning, and income recognition have been brought closer to compliance with international best practices (see Tables 13 and 14). Loan classification rules were strengthened in all countries. The period overdue for interest suspension was shortened to three months in Indonesia and Thailand (this rule had already been tightened in the Philippines). All the countries tightened their specific loan-loss provisioning requirements and introduced or tightened their general provisioning requirements. All the countries, with the exception of the Philippines, have made required loan-loss provisions tax deductible. The definitions of capital have been improved and, in some countries, the absolute minimum levels of capital have been increased. As discussed earlier, banks were given time to comply with these new regulations, according to specific timetables.
Time Period for Overdue Criteria for Interest Suspension and Loan Classification
Varies by type of credit and installment period.
Credit exceeds overdue criteria for substandard but is considered collectible and the value of collateral is not less than 75 percent or credit cannot be collected, but value of collateral not less than 100 percent.
Refers to 21 months after a credit has been classified as doubtful and there is no repayment.
Effective March 1999.
New rules issued October 1997, which tightened overdue criteria for classifying loans depending on number and amount of arrearages, refer only to installment loans.
A loan previously classified as substandard in the last examination is reclassified as doubtful if principal has not been reduced by atleast 20 percent during the preceeding 12 months.
Effective January 1998 irrespective of collateral; previous limit (since July 1995) was 12 months for secured loan.
Time Period for Overdue Criteria for Interest Suspension and Loan Classification
| Period Overdue for | |||||
|---|---|---|---|---|---|
| Country | Interest Suspension | Substandard | Doubtful | Loss | |
| Indonesia | |||||
| Old1 | 1–12 months | 1–12 months2 | 21 months3 | ||
| New | 3 months | 3 months | 6 months | 9 months | |
| Korea | |||||
| Existing | Immediately when past due | Normally not classified until 3 months | |||
| past due unless declared bankrupt | |||||
| Proposed | No changes currently proposed | 3 months | 3–12 months | 12 months | |
| Malaysia | |||||
| Old | 6 months | 6 months | 9 months | 12 months | |
| New4 | 6 months | 3 months | 6 months | 9 months | |
| Philippines5 | 3 months | 3 months (unsecured) | …6 | 6 months (unsecured) | |
| Thailand | |||||
| Old | 6 months7 | 6 months (unsecured) | Over 6 months | Over 6 months | |
| 12 months (secured) | Over 12 months | Over 12 months | |||
| New | 3 months | 3–6 months | 6–12 months | Over 12 months | |
Varies by type of credit and installment period.
Credit exceeds overdue criteria for substandard but is considered collectible and the value of collateral is not less than 75 percent or credit cannot be collected, but value of collateral not less than 100 percent.
Refers to 21 months after a credit has been classified as doubtful and there is no repayment.
Effective March 1999.
New rules issued October 1997, which tightened overdue criteria for classifying loans depending on number and amount of arrearages, refer only to installment loans.
A loan previously classified as substandard in the last examination is reclassified as doubtful if principal has not been reduced by atleast 20 percent during the preceeding 12 months.
Effective January 1998 irrespective of collateral; previous limit (since July 1995) was 12 months for secured loan.
Time Period for Overdue Criteria for Interest Suspension and Loan Classification
| Period Overdue for | |||||
|---|---|---|---|---|---|
| Country | Interest Suspension | Substandard | Doubtful | Loss | |
| Indonesia | |||||
| Old1 | 1–12 months | 1–12 months2 | 21 months3 | ||
| New | 3 months | 3 months | 6 months | 9 months | |
| Korea | |||||
| Existing | Immediately when past due | Normally not classified until 3 months | |||
| past due unless declared bankrupt | |||||
| Proposed | No changes currently proposed | 3 months | 3–12 months | 12 months | |
| Malaysia | |||||
| Old | 6 months | 6 months | 9 months | 12 months | |
| New4 | 6 months | 3 months | 6 months | 9 months | |
| Philippines5 | 3 months | 3 months (unsecured) | …6 | 6 months (unsecured) | |
| Thailand | |||||
| Old | 6 months7 | 6 months (unsecured) | Over 6 months | Over 6 months | |
| 12 months (secured) | Over 12 months | Over 12 months | |||
| New | 3 months | 3–6 months | 6–12 months | Over 12 months | |
Varies by type of credit and installment period.
Credit exceeds overdue criteria for substandard but is considered collectible and the value of collateral is not less than 75 percent or credit cannot be collected, but value of collateral not less than 100 percent.
Refers to 21 months after a credit has been classified as doubtful and there is no repayment.
Effective March 1999.
New rules issued October 1997, which tightened overdue criteria for classifying loans depending on number and amount of arrearages, refer only to installment loans.
A loan previously classified as substandard in the last examination is reclassified as doubtful if principal has not been reduced by atleast 20 percent during the preceeding 12 months.
Effective January 1998 irrespective of collateral; previous limit (since July 1995) was 12 months for secured loan.
Loan Provisioning Requirements: Comparative Information
(In percent)
Based on uncollateralized portion.
Effective at the end of 1996 for Substandard and 1993 for Doubtful and Loss
Classified as precautionary loans.
That portion of a loan classified doubtful or loss that is fully secured will normally be classified substandard to the extent of the market value of the collateral.
Effective 1998 general provision increased from 1 percent to 1.5 percent of total outstanding loans (including interest), net of interest in suspect and specific provisions.
Provision computed against uncollateralized portion.
For collateralized; 25 for uncollateralized.
Effective October 1997 a general provision of 2 percent on gross loan portfolio to be phased in through October 1999 adopted.
For both collateralized and uncollateralized.
Provision computed against uncollateralized portion.
Since June 1997.
Stricter criteria for secured loans.
Loan Provisioning Requirements: Comparative Information
(In percent)
| Country | Unclassified Standard | Special Mentioned | Substandard | Doubtful | Loss | |
|---|---|---|---|---|---|---|
| Indonesia | ||||||
| Old1 | .5 | n.a. | 102 | 502 | 1003 | |
| New | 1 | 5 | 15 | 50 | 100 | |
| Korea | ||||||
| Existing | .5 | 23 | 20 | 754 | 1004 | |
| ProposedNo changes currently proposed | ||||||
| Malaysia | ||||||
| Old5 | 0 | 0 | 206 | 506 | 1006 | |
| New5 | 0 | 0 | 206 | 506 | 1006 | |
| Philippines | ||||||
| Old | 0 | 0 | 07 | 50 | 100 | |
| New8 | 0 | 5 | 259 | 50 | 1009 | |
| Thailand | ||||||
| Old | 0 | 0 | 1510,11 | 10010 | 10010 | |
| New12 | 1 | 2 | 2010 | 5010 | 10010 | |
Based on uncollateralized portion.
Effective at the end of 1996 for Substandard and 1993 for Doubtful and Loss
Classified as precautionary loans.
That portion of a loan classified doubtful or loss that is fully secured will normally be classified substandard to the extent of the market value of the collateral.
Effective 1998 general provision increased from 1 percent to 1.5 percent of total outstanding loans (including interest), net of interest in suspect and specific provisions.
Provision computed against uncollateralized portion.
For collateralized; 25 for uncollateralized.
Effective October 1997 a general provision of 2 percent on gross loan portfolio to be phased in through October 1999 adopted.
For both collateralized and uncollateralized.
Provision computed against uncollateralized portion.
Since June 1997.
Stricter criteria for secured loans.
Loan Provisioning Requirements: Comparative Information
(In percent)
| Country | Unclassified Standard | Special Mentioned | Substandard | Doubtful | Loss | |
|---|---|---|---|---|---|---|
| Indonesia | ||||||
| Old1 | .5 | n.a. | 102 | 502 | 1003 | |
| New | 1 | 5 | 15 | 50 | 100 | |
| Korea | ||||||
| Existing | .5 | 23 | 20 | 754 | 1004 | |
| ProposedNo changes currently proposed | ||||||
| Malaysia | ||||||
| Old5 | 0 | 0 | 206 | 506 | 1006 | |
| New5 | 0 | 0 | 206 | 506 | 1006 | |
| Philippines | ||||||
| Old | 0 | 0 | 07 | 50 | 100 | |
| New8 | 0 | 5 | 259 | 50 | 1009 | |
| Thailand | ||||||
| Old | 0 | 0 | 1510,11 | 10010 | 10010 | |
| New12 | 1 | 2 | 2010 | 5010 | 10010 | |
Based on uncollateralized portion.
Effective at the end of 1996 for Substandard and 1993 for Doubtful and Loss
Classified as precautionary loans.
That portion of a loan classified doubtful or loss that is fully secured will normally be classified substandard to the extent of the market value of the collateral.
Effective 1998 general provision increased from 1 percent to 1.5 percent of total outstanding loans (including interest), net of interest in suspect and specific provisions.
Provision computed against uncollateralized portion.
For collateralized; 25 for uncollateralized.
Effective October 1997 a general provision of 2 percent on gross loan portfolio to be phased in through October 1999 adopted.
For both collateralized and uncollateralized.
Provision computed against uncollateralized portion.
Since June 1997.
Stricter criteria for secured loans.
Several other key prudential regulations are being improved. These include foreign exchange exposure limits in all countries; liquidity management rules in Indonesia, Korea, and Malaysia; connected lending regulations in Indonesia and Korea; single borrower and group exposure limits in Korea and Malaysia; and cross guarantees within chaebols in Korea. Fit-and-proper rules for owners and managers were introduced or strengthened in all countries. In addition, other imprudent banking practices, such as government directed lending, where applicable, are being phased out. The speed with which new regulations could be phased in had to take into account not only bank and supervisory agency constraints in introducing any new regulation, but also crisis-specific elements, such as the ability of their clients to comply with such rules.
Most countries have taken measures to improve transparency and disclosure, as well as the quality of data disclosed. Quality of data has been improved by new loan classification, provisioning, and income recognition rules and by extensive involvement of onsite examiners and international auditors and analysts to support banks’ recapitalization efforts. This is expected to enhance governance and market discipline over time. In Malaysia, following an initial tightening, authorities in 1998 relaxed disclosure requirements, allowing disclosure to be less frequent (semi-annual); however, the regulatory reporting was not changed.60 New bank laws (under preparation in Thailand) or regulations (in Korea and Indonesia) also require banks to report to the public their financial statements more frequently (mostly quarterly) or make their requirements more explicit. Consolidated financial reporting and disclosure by groups will also enhance transparency; in Korea this is promoted by the consolidation and concentration of supervisory functions. In the Philippines, banks listed on the stock exchange are now required to disclose to the public on a quarterly basis key indicators on their soundness.
The countries with blanket guarantees intend to remove them as soon as feasible. All countries intend to move from a blanket guarantee to a limited coverage of all depositors.61 There are major dangers, such as deposit runs, in removing the guarantee before the financial system is sound, however. For a limited scheme to work, a number of preconditions have to be met, including the banking system’s return to solvency and profitability, the adoption of mechanisms to deal with the exit of individual banks, and the restoration of public confidence. The public should be provided ample notice of the removal of the guarantee and detailed information on the limited guarantee scheme that replaces it. The lifting of the blanket guarantee, when it occurs, should be a nonevent.
Regulations Governing Creditors
Efforts are being undertaken to address weaknesses in the operation and supervision of international lenders, as they have been identified during the Asian crisis. Initiatives include work on a new international financial architecture, the Financial Stability Forum, enhanced financial sector surveillance by international financial institutions, and work by the Basel Committee on Banking Supervision, whose Supervisory Lessons to be Drawn from the Asian Crisis proposes a review of various elements of the existing capital rules and of the Basel Committee’s guidance on country risk. (See Basel Committee on Banking Supervision, 1999.)