Third Basel Accord was agreed by
members of Basel Committee on Banking Supervision back in 2010 itself,
scheduling to introduce by 2015, which was later taken forward up to 2019.
By 2013, Central Banks of South
Asia came up with the conclusion that Basel III is not going to affect
commercial banks. The study and then made banking sector and major South Asian
economy relaxed upon the fact that Cash Reserve Ratio and Statutory Liquidity
Ratio that leading banks of South Asia had been meeting every aspects and
criteria mentioned in Basel III. It has mentioned the fact that Basel III's
criteria of meeting Tier I capital of 6% and total capital of 10% of Risk
Weighted Exposures had been meeting by these nations, and therefore the
situation won't be much stressed. as the capital and liquidity requirements had
already been increased, requirements of paid up capital had been increased and Central
Banks had been playing significant role in maintaining CRR, SLR and net liquid
to deposit ratios at satisfactory level.
Basel III is entirely focused on
improvement and standardization in banking system throughout the world. It
creates confidence among the banking sector to absorb any type of shocks if
found somewhere, helps to strengthens bank's transparency and overcome economic
stress as well. Creating opportunity for further strengthening banking system,
Basel III concentrates more on improvement of South Asian financial system in
the long run. However, implementation of third Basel Accord is not piece of
cake - there are different challenges that have to be faced. When the
implementation is a challenge for developed nation, it turns out obvious to be
more challenging for developing nations within South Asia for sure.
Organization for Economic
Cooperation and Development (OECD) fears that implementation of Basel III will
decrease annual GDP of any nation by 0.05% to 0.15%. World Bank's databank has
shown annual GDP growth rate of South Asia being around 5% on average. Similarly, McKinsey and Company
has clearly mentioned that third Basel Accord will reduce Return on Equity for
average banks by around 3% in Europe and 4% in United States. So, when ROE can
get reduced in Europe and United States, the case can't be that aloof from
other part of the world.
Banks in UAE geared up last year
and realized problem over capital buffers and had trouble determining optimal
economic capital allocation. South Asia may face further trouble in regard to
capital management as well. Return on Equity (ROE), Profitability and dividends
are already low in among large banks of South Asia. This accord is likely to
further diminish the rate of them making investors fear upon investing thereby.
Bankers in UAE were alert about competition for finding stable sources of
funds, deposits and savings accounts to satisfy liquidity rules, and this very
issue can be related to South Asian scene as well.
Central Banks of South Asian
countries can shape itself as per the accord's requirement, but the trouble
lies within internal banking system, where current portfolio and business model
has to be granted a new shape. There should be changes brought in regard to
funding and deposit structures. At this phase, when banks fear of liquidity,
the impact cannot be desirable. Also, Security Board has been trying to attract
investors through different flexible and ease assuring schemes. It then gives
sufficient reason for banks to fear. Reduction in lending capacity of banks can
lead to compulsion for retail business model.
As this accord has reserved 2.5%
on capital conservation and 2.5% on cyclical buffer, moving incomes of loans,
liquid assets, funding costs and policies concentrating on lending and deposits
are likely to be affected as well. Ultimately leading to impact the
profitability of the banking sector. Similarly, the other obstacle that can be
surrounded could be infrastructure issues. But, this accord seems to trouble,
as the information flow does not turn out to be quick and speedy here.
Meanwhile, the human resources
barrier appears out then. Are there competitive Human Resources to cope up with
challenges of modern, dynamic environment? Are the man powers really skilled
and aware about the scenes in banking world? Large number of employees doesn't
know what Basel is all about. Far lies banking knowledge, people working in
bank seem to be lagging lot behind in these cases. This accord is again imposed
at national level only during the times of excessive credit growth and made
flexible at the time of credit contraction. Mechanism to calculate buffer and
determination of buffer rate, about appropriate timing can be next challenge
thereby.
Finally, won't the role of
banking sector restrict in economic development? Today, banks are prime lenders
in any sort of development project, and they can easily assist. But since Basel
III reduces investing capacity, areas expecting support from banking loans may
have to turn down their head. When the balance sheet itself is reduced, can
they support funding for any project like they used to do? Or, like they were
meant to do? How to tackle with the claims made by McKinsey and Company? Can
banks generate further capital to work beyond and bring less impact over their
balance sheet?
There seems to be pressure for
Basel Committee to work for simplification of the accord, and also talks relating
to Basel IV have been emerging at time. But, the simplification on Basel could
rather welcome further complexities. However, there not everything to fear
about, as the policies are designed seeking some potential and opportunities.
Basel III ensures increased quantity and quality of capital making banking
sector strong financial institution. It tries its best to take control over
risk management. This accord ensures that banks won't fail easily throughout
the world. Central banks should move accordingly and take stepwise initiative
to meet the requirements and fit in the global scene.. Things certainly are not
as easy as presented in the paper of 2013, and the logics presented back
probably are less relevant. Rather than giving shock all of sudden, it is
important to work out from very early.
Published in Pakistan Observer, Pakistan based daily newspaper on 6th Feb, 2019
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