Basel III will keep banks fairly busy in a variety of ways. It will absorb huge amounts of resources. It will not be only financial ones but also in terms of manpower, management attention, IT-capacity and budgets for external consulting services. It will incur additional indirect costs besides the direct costs of higher equity. Many banks will have to raise new equity. The management board has to decide which form of equity to acquire. It needs preparation, marketing and execution. There will be an issue of shares and cost for lawyers, servicers etc.
All these new regulatory measures require calculations, some of them being very complex. This requires data, data analysis, linking of data and quality of data. The complexity of reporting and operations will increase. Depending on the existing IT-systems, these new requirements will probably lead to substantial implementation efforts in IT-implementation and testing.
SBP POLICIES AND GUIDELINES
The State Bank of Pakistan (SBP) made strict its condition for using Cloud Computing services by the banks. Previously up to 30 percent of services could be availed from outside the country through foreign service providers that have an edge on local companies.
State Bank of Pakistan has directed banks to utilize cutting-edge Cloud Computing technology. Their systems and service providers shall be located in Pakistan along with all physical servers and services that are also operable from within Pakistan.
SBP rolled out a draft of “Framework on IT Governance and Risk Management in Financial Institutions” for commercial banks, microfinance banks and DFIs.
State Bank of Pakistan’s has directed to initiate to implement Basel III. These are a set of international reforms designed to improve regulation, supervision and risk management in the banking sector.
It is expected that Pakistani banking authorities will adopt this package from December 31.
It is also expected that limited implementation of the Basel will not jolt Pakistan’s banking, for the early short term.
The implementation of Basel III will be insignificant as far as large banks are concerned.
The strict and rigid capital adequacy requirements in place, the reduced dividend capability of some neither nor big or small banks can generate fears in forthcoming years.
Under Basel III, which was first drafted by the ‘Basel Committee on Banking Supervision’ in 2009 in response to the 2008 recession, banks must maintain adequate leverage ratios and meet certain capital requirements.
The State Bank of Pakistan issued schedule for implementation of key tools for measurement of the liquidity risk of the banking system under Basel III reform package.
The experience of Global Financial Crisis illustrated that liquidity and funding risks are critical risk factors that can lead to any bank’s insolvency/failure in case of inadequate risk management practices.
The SBP intends to adopt the Liquidity Standards as proposed by the Basel Committee on Banking Supervision under its Basel III reforms package.
According to SBP, the transitional arrangements are closely in line with the prospects for raising capital through market channels, said the credit rating agency.
INDIA’S BANKING POLICIES
The agency felt that the Reserve Bank of India’s recent proposal to allow banks to issue “masala bonds” – rupee-denominated bonds issued in offshore capital markets could also help widen the investor pool and ultimately deepen the market for AT1 bond issuance.
The progressive increase in minimum capital requirements under Basel III is likely to put nearly half of Indian banks in danger of breaching capital triggers, according to Fitch Ratings. 27 Indian banks with outstanding capital instruments indicates that at end-June 2016 the total capital adequacy ratio (CAR) for 11 banks was at or lower than the minimum of 11.5 percent required by end-March 2019 .
Six did not have enough capital to meet the minimum required by fiscal year said Fitch Ratings. Fitch estimates that Indian banks will require around $ 90 billion in new capital by fiscal year 19 to meet Basel III standards, with the state banks accounting for about 80 percent of the total.
The government has already earmarked Rs70,000 crore (US$10.4 billion) for capital injections into state banks through to fiscal year 2019 and in July it announced that Rs22,900 crore was being front loaded.
Fitch observed that priority is being given to the banks most in need of new capital but the capital injections may not be sufficient to address their ongoing capital needs to meet required provisions and to support balance sheet growth. It believes that more capital will be needed from the government to restore market confidence.
The agency felt that the Reserve Bank of India’s recent proposal to allow banks to issue “masala bonds” – rupee-denominated bonds issued in offshore capital markets – could also help widen the investor pool and ultimately deepen the market for AT1 bond issuance. Indian banks will continue to face difficulties in raising capital from the market, which will keep their Viability Ratings under pressure and will weigh on the sector outlook.