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Sri Lanka Ready For Basel III

  • Banks’ Capital Adequacy

The minimum regulatory capital required under Basel II is equivalent to 8% of risk weighted assets, a risk consultant said.
Eckart Koerner of KPMG Management & Risk Consulting, Malaysia, addressing a seminar in Colombo on Thursday (September 26) said that Basel III however increases the capital requirement from 8% to 10.5%.
In Sri Lanka this is already 10%, he said.
Koerner further said that the island will probably apply for the Basel III Accord next year. Malaysia already has this in place.
He said that capital buffers are becoming more relevant. There needs to be strategies in place to maintain capital buffers. Banks in Europe have insufficient capital to provide loans. Reduced credit will bring up the shadow banking system, said Koerner.
“Low risk” rated banks have sufficient buffer.
He also said that the global financial crisis of 2008/09 would not have been severe if the USA had adhered to Basel II. Post crisis, the USA is now adhering to the same and adopting certain proviso more stringently than Basel, he said.
For instance in the Basel Accord, though the leverage ratio is 3%, the US authorities had doubled this requirement to 6%. Some of the bigger US banks even have to conform to Basel III, said Koerner.
He said that prior to the global financial crisis, the Chief Risk Officer (CRO) of Goldman Sachs, in 2006, advised the bank to reduce its exposure to the subprime market. The CRO of UBS had also given similar advice to his Board, but he was rewarded for his efforts by being fired.
Ultimately the Swiss Government had to pump in between 20-30 billion Swiss Francs to bail out UBS, said Koerner.
Responding to a query made by Yvette Fernando, Central Bank of Sri Lanka’s (CBSL’s) Director Bank Supervision, when she asked, what is the capital one needs for the risks undertaken? Koerner said that in his experience, the internal capital required by banks ranged from a minimum of 12% to a maximum of 27%.
He also posed the question, “How much of your financial resources/capital may be apportioned off in the event of loss/default?” How much capital does one need to maintain?
Koerner said that in a region like Europe, where interest rates are near zero, the effect of interest rates going up by 200 basis points would be severe. But in countries where interest rates are in the region of 9-12%, the impact of such a rise in rates would not be severe.
Fernando In her speech said that banks cannot undermine the importance of capital, not just the quantity, but its quality as well.
She said that bank boards were primarily responsible for risk management. That is mandated in the Companies Act, said Fernando.
She said that most banks were well above the Basel III minimum capital requirements.
Fernando said that the Internal Capital Adequacy Assessment Process (ICAAP) “supervisory process” would be implemented next year.
Sanath Manatunga, CRO, Commercial Bank plc, in his speech said that the object of Basel was to have control over excessive risk taking as banks were custodians of depositors’ money.
He said that the Basel code was a business enabler and not a stumbling block.
The occasion was a seminar on “Risk Management” organised by KPMG Sri Lanka.
– Paneetha Ameresekere

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