RUPAK D SHARMA
Nepal Rastra Bank (NRB) has postponed plans for phase-wise roll out of latest international regulatory frameworks aimed at strengthening the shock absorbing capacity of banks.
The banking sector regulator had previously decided to introduce Basel III regulatory frameworks at commercial banks from the beginning of 2015. It is now mulling over launching those regulations from mid-July next year.
“We were supposed to finalise drafts of regulations on implementation of Basel III Capital Regulations by October. But we couldn’t,” NRB Director Basudev Adhikari told The Himalayan Times yesterday.
“We are now planning to finalise the documents within mid-January and introduce Basel III from mid-July next year.”
Basel III frameworks were introduced by the Switzerland-based Basel Committee on Banking Supervision in December 2010, as a measure to improve the shock absorbing capacity of the banking sector, which had been badly hit by the global financial crisis of 2007 to 2009.
Since the latest global financial crisis was the result of the banking sector’s exposure to complex and risky products like derivatives, the Basel III frameworks have focused on enhancing the resilience of banks through improved risk management techniques, such as creation of additional capital buffers and disclosure of off-balance sheet assets, like letters of credit and forward exchange contracts.
In order to introduce these provisions in a phase-wise manner, NRB has prepared a timetable for transition from Basel II to Basel III between 2015 and 2019.
As per the Basel III accord, banks will have to maintain Tier 1 capital of six per cent of risk weighted assets in 2015, which will eventually be raised to seven per cent by 2019.
Tier 1 capital incorporates paid-up capital, retained earnings, irredeemable non cumulative preference shares and share premium, among others, while risk weighted assets include assets such as government securities, which carry zero per cent risk weight, and investment in private equity, which carry 150 per cent risk weight.
Since NRB has made it mandatory for commercial banks to maintain Tier 1 capital at six per cent of risk weighted assets, class ‘A’ financial institutions, excluding state-owned Rastriya Banijya Bank and Nepal Bank Ltd, will have no problem in meeting this requirement.
But there is a caveat: the proportion of common equity in Tier 1 capital should stand at 66.67 per cent in 2015, which will be reduced to around 64.30 per cent by 2019, shows the NRB timetable designed in April.
In other words, minimum common equity capital ratio should stand at 4-4.5 per cent of risk weighted assets in between 2015 and 2019, while the portion of non-core Tier 1 capital will rise from two per cent of risk weighted assets in 2015 to 2.5 per cent in 2019.
Banks here currently do not take common equity into account while calculating Tier 1 capital. However, the central bank says commercial banks, excluding the two state-owned banks, will not have problem in meeting this requirement as they are currently required to maintain paid-up capital of at least Rs two billion.
Another new provision in Basel III is capital conservation buffer.
Initially, the buffer should be maintained at one per cent of the risk weighted assets and gradually raised to 2.5 per cent by 2019.
Currently, commercial banks here have to maintain a capital adequacy ratio (CAR) of 11 per cent to be able to distribute dividend among shareholders — although minimum regulatory CAR requirement stands at 10 per cent.
This means commercial banks here are already maintaining capital conservation buffer of one per cent as mandated by the Basel III accord. So, they need not panic for now.
This is the same in the case of minimum total capital requirement. Basel III makes it compulsory for banks to maintain minimum total capital of nine per cent of the risk weighted assets in 2015, which will be reduced to 8.5 per cent by 2019.
Commercial banks, except the two state-owned class ‘A’ financial institutions, currently hold minimum total capital of 10 per cent of risk weighted assets, so this Basel III requirement will not create difficulties for class ‘A’ financial institutions. “In fact, none of the Basel III regulatory framework is likely to affect the commercial banks here, as we have already abided by them,” Sanima Bank CEO Bhuvan Dahal told The Himalayan Times.
Trickier issues
There are certain trickier issues in the Basel III regulatory framework. One among them is the provision on counter cyclical buffer. As per this provision, regulator can instruct banks to keep aside funds equivalent to up to 2.5 per cent of risk weighted assets if there is excessive credit growth.
“However, we may not be able to introduce this provision at the moment as such buffers need to be created based on effectiveness of credit on the economy, which we cannot calculate at the moment,” a senior NRB official said on condition of anonymity.
Also under discussion is the provision on liquidity coverage ratio. This is basically a ratio of high quality liquid assets, such as government bonds and deposits in vault, to projected total net cash outflow in the 30-day period, which includes liabilities such as deposits that banks have to settle in next one-month period. Such ratio should be at least 100 per cent or more.
Among others, introduction of leverage ratio is also under discussion. This provision bars banks from holding balance sheet assets, like deposits, and non-balance sheet assets, like letters of credit and derivative products, in excess of 33.33 times the minimum Tier 1 capital.
This measure was introduced keeping 2007 financial crisis in mind as many banks then had held large portion of off-balance sheet assets, whose value later fell tremendously, forcing many to shut down businesses.
source:RUPAK D SHARMA , The Himalayan Times, 13 Nov 2014
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Nepal Rastra Bank (NRB) has postponed plans for phase-wise roll out of latest international regulatory frameworks aimed at strengthening the shock absorbing capacity of banks.
The banking sector regulator had previously decided to introduce Basel III regulatory frameworks at commercial banks from the beginning of 2015. It is now mulling over launching those regulations from mid-July next year.
“We were supposed to finalise drafts of regulations on implementation of Basel III Capital Regulations by October. But we couldn’t,” NRB Director Basudev Adhikari told The Himalayan Times yesterday.
“We are now planning to finalise the documents within mid-January and introduce Basel III from mid-July next year.”
Basel III frameworks were introduced by the Switzerland-based Basel Committee on Banking Supervision in December 2010, as a measure to improve the shock absorbing capacity of the banking sector, which had been badly hit by the global financial crisis of 2007 to 2009.
Since the latest global financial crisis was the result of the banking sector’s exposure to complex and risky products like derivatives, the Basel III frameworks have focused on enhancing the resilience of banks through improved risk management techniques, such as creation of additional capital buffers and disclosure of off-balance sheet assets, like letters of credit and forward exchange contracts.
In order to introduce these provisions in a phase-wise manner, NRB has prepared a timetable for transition from Basel II to Basel III between 2015 and 2019.
As per the Basel III accord, banks will have to maintain Tier 1 capital of six per cent of risk weighted assets in 2015, which will eventually be raised to seven per cent by 2019.
Tier 1 capital incorporates paid-up capital, retained earnings, irredeemable non cumulative preference shares and share premium, among others, while risk weighted assets include assets such as government securities, which carry zero per cent risk weight, and investment in private equity, which carry 150 per cent risk weight.
Since NRB has made it mandatory for commercial banks to maintain Tier 1 capital at six per cent of risk weighted assets, class ‘A’ financial institutions, excluding state-owned Rastriya Banijya Bank and Nepal Bank Ltd, will have no problem in meeting this requirement.
But there is a caveat: the proportion of common equity in Tier 1 capital should stand at 66.67 per cent in 2015, which will be reduced to around 64.30 per cent by 2019, shows the NRB timetable designed in April.
In other words, minimum common equity capital ratio should stand at 4-4.5 per cent of risk weighted assets in between 2015 and 2019, while the portion of non-core Tier 1 capital will rise from two per cent of risk weighted assets in 2015 to 2.5 per cent in 2019.
Banks here currently do not take common equity into account while calculating Tier 1 capital. However, the central bank says commercial banks, excluding the two state-owned banks, will not have problem in meeting this requirement as they are currently required to maintain paid-up capital of at least Rs two billion.
Another new provision in Basel III is capital conservation buffer.
Initially, the buffer should be maintained at one per cent of the risk weighted assets and gradually raised to 2.5 per cent by 2019.
Currently, commercial banks here have to maintain a capital adequacy ratio (CAR) of 11 per cent to be able to distribute dividend among shareholders — although minimum regulatory CAR requirement stands at 10 per cent.
This means commercial banks here are already maintaining capital conservation buffer of one per cent as mandated by the Basel III accord. So, they need not panic for now.
This is the same in the case of minimum total capital requirement. Basel III makes it compulsory for banks to maintain minimum total capital of nine per cent of the risk weighted assets in 2015, which will be reduced to 8.5 per cent by 2019.
Commercial banks, except the two state-owned class ‘A’ financial institutions, currently hold minimum total capital of 10 per cent of risk weighted assets, so this Basel III requirement will not create difficulties for class ‘A’ financial institutions. “In fact, none of the Basel III regulatory framework is likely to affect the commercial banks here, as we have already abided by them,” Sanima Bank CEO Bhuvan Dahal told The Himalayan Times.
Trickier issues
There are certain trickier issues in the Basel III regulatory framework. One among them is the provision on counter cyclical buffer. As per this provision, regulator can instruct banks to keep aside funds equivalent to up to 2.5 per cent of risk weighted assets if there is excessive credit growth.
“However, we may not be able to introduce this provision at the moment as such buffers need to be created based on effectiveness of credit on the economy, which we cannot calculate at the moment,” a senior NRB official said on condition of anonymity.
Also under discussion is the provision on liquidity coverage ratio. This is basically a ratio of high quality liquid assets, such as government bonds and deposits in vault, to projected total net cash outflow in the 30-day period, which includes liabilities such as deposits that banks have to settle in next one-month period. Such ratio should be at least 100 per cent or more.
Among others, introduction of leverage ratio is also under discussion. This provision bars banks from holding balance sheet assets, like deposits, and non-balance sheet assets, like letters of credit and derivative products, in excess of 33.33 times the minimum Tier 1 capital.
This measure was introduced keeping 2007 financial crisis in mind as many banks then had held large portion of off-balance sheet assets, whose value later fell tremendously, forcing many to shut down businesses.
source:RUPAK D SHARMA , The Himalayan Times, 13 Nov 2014
LINK
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