Asian banks face hedging threat

Hong Kong - The Basel II bank capital adequacy accord could stop Asia's banks from hedging risk, resulting in their being shut out of the global banking system entirely, says Paul Sheehan, Hong Kong-based co-head of Asian bank research at US investment bank Lehman Brothers. The problem is particularly acute for banks in Thailand, Indonesia, the Philippines and South Korea, Sheehan told a Hong Kong seminar on the impact of Basel II in July.

Sheehan said higher risk weightings of up to 150% for low-rated credits, under the standardised approach to finding a credit risk capital charge, may mean a number of global banks will cease dealing with Asia's smaller banks. "I think it is important to realise that most of the derivative hedging trades done in these small markets, such as Thailand, have the global banks as counterparties," says Sheehan. "And under the 150% risk weighting system, it's going to be an extraordinary bank that