MORE work remains on putting into practice current banking regulations globally, said managing director of the Monetary Authority of Singapore (MAS) Ravi Menon this week.
He also warned that further tightening of regulations in areas such as trade finance could constrain lending and derail economic growth.
This comes as concerns over regulatory arbitrage remain, with the European Union (EU) found to be "materially non-compliant" in the implementation of Basel III capital standards, Mr Menon pointed out in his keynote address at the symposium on Asian banking and finance in San Francisco.
"The United States and a number of Asian countries - including Singapore, Hong Kong, China and Japan - were assessed to be compliant or largely compliant in their implementation of the Basel III capital standards," said Mr Menon.
"As home to several of the largest global banks as well as important international financial centres, it is crucial that the EU shows leadership in ensuring more complete and consistent implementation of global banking rules."
He noted that with key regulatory reforms put in place, capital requirements have been lifted through Basel III, and banks that are "too big to fail" - or so-dubbed global systemically important banks - are now subjected to more intensive supervision, tougher capital standards, as well as resolution plans, or what are known commonly as living wills.
But besides issues in inconsistent implementation of rules, there remains "significant work" on putting resolution plans for "too big to fail" banks into operation, said Mr Menon.
He noted that regulatory reforms have been, overall, effective. Banks are now stronger, since between 2009 and 2014, large and internationally active banks have doubled their average common equity tier 1, or CET1, ratio from just under 6 per cent to more than 11 per cent. This ratio refers to a bank's core equity capital against its risk-weighted assets.
Banks are now holding more liquid assets, while leverage levels for such financial institutions have dropped from around 22 times of equity, to about 16 times, said Mr Menon.
And against pressure from the prolonged low growth, low-rate environment, sharp volatility and an overall contraction in market liquidity, banks have shown their resilience. Most of the large banks in the US passed the Federal Reserve's latest annual stress test. Singapore's banking system also remains sound when tested against severe economic stress scenarios in the major economies and Asian region, said Mr Menon.
"Bank lending to the real economy has been stable . . . even as banks met higher capital and liquidity requirements."
But he highlighted the falling return on equity of banks that speak to the declining profitability of the industry. While high returns during the pre-crisis period were in part due to excessive risk taking or leverage, banks have to be remain "reasonably profitable" to be sustainable, said Mr Menon. "Banks have to earn a decent return on their credit intermediation role," he said, adding that retained earnings make up the highest quality of capital held by banks.
As the Basel committee works to fine-tune Basel III capital rules, Mr Menon warned against raising overall capital requirements excessively through certain risk calibrations that the Basel committee is weighing.
In particular, he said that regulations should not unduly penalise lending to important segments of the economies, such as trade and small-and-medium enterprises.
He pointed out that a proposed change in the way bank exposures are measured could result in imposing significantly higher capital requirements for trade finance. These would be "more punitive than justifiable by its historical losses", Mr Menon said, noting that trade finance - being short-term and self-liquidating in nature - is probably one of the safer forms of bank lending.
"While the availability and cost of trade finance have so far held up well in the face of Basel III implementation, the latest set of proposals could have the effect of discouraging banks from trade financing. This is not what we need at a time when trade is growing more slowly than income in many parts of the world.
"In trying to get the micro calibrations right, we must not end up getting the macro settings wrong. We must guard against these unintended outcomes."