Author Topic: Preparation of banks in implementing Basel III  (Read 231 times)

Offline Deanfbe

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Preparation of banks in implementing Basel III
« on: May 29, 2016, 09:56:50 AM »

According to latest information from Bangladesh Bank, Bangladesh is planning to prepare banks for implementing Basel III (The Daily Star, May22, 2016). Bangladesh Bank has given directions to banks to implement Basel III from January 01, 2015 in phases and fully by January 01, 2019. As Basel III framework was basically the response of global banking regulators to deal with the factors, more specifically those relating to the banking system that lead to the global economic crisis or the great recession, Basel III Provides improved risk management systems in banks. By practicing these risk management systems, banks therefore are expected to be more shock absorbent in future.
However some economists think that Bangladesh bank may face some challenges. Any change brings some challenges. So it is expected that Bangladeshi banks will face several challenges to implement Basel III.  As per guidelines of Bangladesh Bank, banks maintained 10 percent of risk-weighted asset in 2015, But gradually it will go up and finally banks will maintain 12.50 percent in 2019 when full implementation of capital ratios will be executed. Besides, banks need to maintain leverage ratio of 3 percent based on amount of Tier-I capital as percentage to total exposure of banks. Seemingly, private commercial banks (PCBs) are capable of increasing these percentages comfortably. However, the recent deterioration of asset quality of state-owned commercial banks (SCBS) and some PCBs has created uncertainty about their capacity to generate capital internally. In this perspective, banks can initiate to amplify their internal ability for generating capital through reducing costs, ensuring quality of loans and forming loan portfolio contemplating the risk weights fixed by Bangladesh Bank. In case of necessity of adding capital from external sources, the government may follow traditional trajectory through injecting new capital to SCBs for ensuring sufficient amount of capital.  Additionally, banks can raise the amount of capital by offloading a certain percentage of shares, inviting organizations like International Finance Corporation (IFC), and Islamic Corporation for the Development of the Private Sector (ICD) for participation in banks' capital and issuing different debt securities.
Fiscal and monetary authority can motivate banks for utilizing these innovative options for the enhancement of capital through giving necessary policy supports. It is well accepted that the government may not inject capital to SCBs for unlimited period from the taxpayers' money.  Banks, therefore, need to enhance their internal capacity to increase necessary amount of capital for covering risk exposure they undertake.
In case of liquidity framework, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are actually framed as liquidity performance parameters. Through these ratios, banks can visualize well ahead of incurring liquidity problems and take necessary steps to address this problem without the help of the central bank. It is anticipated that banks of Bangladesh will not face major challenges in maintaining both ratios. Bangladesh Bank has already observed ability of banks in maintaining ratios on a trial basis almost for one year and found all banks with a few exceptions are capable to maintain these parameters.
A few other factors like technology, skills development and governance are being considered as challenges in implementing Basel III. The revised approaches for using risk-weighted assets will be dependent on a number of computational requirements. Banks may need to upgrade their systems and processes to be able to compute an amount of risk-weighted assets as well as capital requirements based on revised guidelines. Apart from technological up gradation, higher specialized skills development in the supervised banks and within Bangladesh Bank is a challenge to ensure proper implementation of Basel III. Top management and human resource development policy of banks, thus, need to get tuned with this requirement. The central bank also needs to improve skills in regulating and supervising under the new system.
The Basel Committee on Banking Supervision added a separate principle on corporate governance in its core principles in 2012. It is welcomed in Bangladesh in the sense that while strong capital gives financial strength, it cannot assure good performance unless good corporate governance exists. We need to fix and ensure this issue for the interest of having a strong financial sector like global community. We believe that banks of Bangladesh have the capacity to address these challenges for the full implementation of Basel III. If any lacking does exist, it is expected that banks will take required initiatives to bridge the gap.

Offline Rozina Akter

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Re: Preparation of banks in implementing Basel III
« Reply #1 on: July 05, 2016, 10:57:38 AM »
informative post
Lecturer in finance