By Charles F. Moreira
Some commercial banks are facing difficulties in complying with the time frame to implement the guidelines and standards required by the Basel Committee on Banking Supervision’s (BCBS’s) Basel III agreement between central banks of several countries. This is especially with regards to their maintenance of a minimum reserve capital liquidity equivalent to their risk-weighted assets.
Basel III requires they maintain a total of 16% reserve, including total capital and buffers. Banks have till 2019 to phase into full compliance. On the other hand its predecessor Basel II only required they maintain a total reserve of 8%.
Its reforms were conceived to prevent a repeat of the 2008 global financial crisis and to prevent against situations such as with Britain’s Northern Rock bank which ran out of ways to fund itself, and for the first time, its new measures specify how much and what type of liquid instruments can be held.
However, in January 2013, the Philippines Central Bank (BSP) announced that the full implementation of Basel III reforms may not proceed in 2014. This is according to its deputy governor Nestor Espenilla Jr.
While the capitalisation requirements have already been finalised, new liquidity rules for the banking industry will still have to undergo formal consultations before being drafted and that reforms may not have to begin next year.
“We have to consider the available liquid assets in Philippine jurisdiction and relative position of the banks,” he was quoted as saying. “Given our position now, I think it is not going to be a big problem. As I said before, the best time to introduce reforms is during the time that we are in a position of strength.”
The Philippines had earlier brought forward its implementation of the Basel III requirements to January, 2014, instead of 1 January, 2015.
However, liquidity regulations remain pending, especially after the BCBS announced revisions targeted at providing leeway to banks in January this year.
In particular, banks there were allowed to maintain a liquidity coverage ratio (LCR) — devised to ensure they have enough assets to cover for possible liquidity disruptions— of 60% by Jan. 1, 2016, rising by 10 percentage-points per year until 2019. Originally, a 100-percent LCR should be achieved by Jan. 1, 2015.
Overly-complicated
Also in January, Andrew Haldane, Bank of England director of financial stability complained that the Basel III regulations are overly-complicated and need to be simplified before coming into effect, since their current form is impractical.
Haldane told the U.K.’s Parliamentary Commission on Banking Standards that efforts by the BCBS to alter the guidelines are already underway as there is a growing recognition among regulators that the plans may represent a “false turn in the road”.
“Regulators cannot really police this complex beast – there are moves afoot … to simplify and streamline the move to a proper regulatory rather than self-regulatory edifice,” Haldane said, and also warned that any changes “may take some time.”
Earlier in January, banks wrung a concession from the BCBS to give them more time to build up enough cash reserves to survive a 30-day credit crunch and the committee extended the deadline from 2015 to 2019. Banks were also to count more types of assets as part of their total liquidity.
From the outset banks had complained that having to build up such assets would restrict their ability to lend to households and businesses.
Established in 1974 by the governments and monetary agencies of the Group of Ten developed nations (the G10) and with a membership of around 27 countries today, the Switzerland-based BCBS has no power to enforce its standards and guidelines commercial banks in any country but the central banks of respective countries do.
A technology response
SAP’s VP of financial services in APJ, Michel Borst had admitted that banks face ever changing and increasingly complex regulatory reforms. “The impact will be extensive due to the complexities of compliance and the huge penalty of compliance failure.”
He also opined that banks currently are taking a reactive approach and that most of the solutions are tactical fixes that do not take into account data sources or address the need for transparency to regulators and key stakeholders.
He said, “SAP offers banking institutions a comprehensive solution suite to full compliance with Basel III. It comprises strong data quality management tools, a single data mart for risk and finance, sophisticated risk measurement engines, and powerful reporting tools. It is built in a modular but integrated architecture which caters to different implementation strategies.”
