‘Most banks to meet capital requirements’

Basel-III sets revised liquidity standards.

KARACHI:

State Bank of Pakistan (SBP) Deputy Governor Yaseen Anwar has expressed hope that majority of banks operating in the country will comfortably meet the new capital requirements as well as the liquidity standards of Basel-III.

However, SBP will continue to work with those banks that may face some problem in achieving the standards promptly.

Inaugurating a three-day ‘Saarc Finance Regional Seminar on Basel-III and Policy Response in Saarc Countries’ at the National Institute of Banking and Finance (NIBAF), Islamabad on Monday, he said that the banking sector enjoys a healthy capital adequacy ratio of 14 per cent because of the central bank’s highly focused and strict banking supervision policies and oversight.

“This is a remarkable achievement given the fact that for the last two years the sector has faced a sluggish economic environment and a marked rise in overdue loans,” Anwar said, adding it now appears that most banks have sufficient capital buffers to manage moderate shocks in credit and market risks.

Anwar said that in the broad area of risk management, which ultimately feeds into the Basel implementation, SBP has put in place detailed guidelines for banks. “This has gradually started improving the risk management practices at all banks and will also help the banks which would opt for advance approaches in future,” he said.

Anwar said that the main components of the new Basel framework are aimed at protecting from the types of internal and external shocks banks and banking systems often face, regardless of the state of development or complexity.

He said the new framework substantially raises the quality and quantity of capital, with a greater focus on common equity. “With tangible common equity (TCE), which comprises paid-up capital and retained earnings (minus intangibles), there would be an improvement in capital quality to better absorb losses from shocks which could emanate from anywhere,” he added.

He further said that the crisis has shown that balance sheets were being leveraged, but the risk-based framework failed to fully or adequately capture this dynamic. Recognising this problem, the Basel Committee has now introduced a simple, non-risk based leverage ratio to supplement the risk-based capital requirement that captures risks arising from total assets, he observed.

“It introduces two types of capital buffers. The conservation buffer is oriented towards absorbing losses not only in normal times, but also during times of economic stress,” he said and observed that additionally the countercyclical buffer takes into account the dangers of rapid credit growth, which might be particularly relevant for emerging economies.

“Finally, the crisis highlighted the risk of poor liquidity management. As such, another feature is the introduction of liquidity buffers - for instance, banks must hold a sufficient position of high-quality liquid assets to allow them to survive a whole month’s loss of access to funding markets,” he added.

Published in The Express Tribune, April 12^th,  2011.