This paper was presented at the SAFA Workshop on Impact of Basel II, held on September 8, 2014 in Dhaka, Bangladesh. By Sayyid Mansoob Hasan, FCMA - Chairman SAFA Task Force to develop a strategy to combat corruption in SAARC Region.
SAFA: South Asian Federation of Accountants
2. BASEL ACCORDS?
• Banking supervision accords issued by the
Basel Committee of Banking Supervision BCBS
• They are called Basel Accords as BSBC
maintains its secretariat at the Bank for
International Settlement in Basel, Switzerland
• The Basel Accords is a set of
Recommendations for Regulations in the
banking industry
3. BCBS
• Initial Committee comprised G10 (IMF Members +
Germany and Sweden) now G20
• IMF Members include Belgium, Canada, France, Italy,
Japan, the Netherlands, the UK and the USA
• G20 comprises Argentina, Australia, Brazil, Canada,
China, France, Germany, India, Indonesia, Italy, Japan,
Republic of Korea, Mexico, Russian Federation, Saudi
Arabia, South Africa, Turkey, United Kingdom, United
States and the EU
• Also comprises Singapore and Hong Kong
• G20 controls 85% GWP (gross world product) and 80%
of global trade
5. BASEL-1
• Dealt mainly with “international convergence
of capital measurement and capital standards”
to reduce risk in the banking industry
• Set standards to reduce the risk of the banks
by finding a common definition of capital,
and its division into various categories
according to its risk profiles, and by making it
mandatory for the banks to maintain a
minimum capital ratio against the risks
7. BASEL-II
• Provides a new capital adequacy framework
• Basel-II is a flexible document and may be
modified by each regulator in accordance with
the needs of its sector
• Moreover, for each bank, Basel-II accords would
only be minimum standards and would not limit
the banks to rely only on Basel-II compliance
• Basel-II is based on three pillars;
– Pillar 1 Minimum Capital Requirement
– Pillar 2 Supervisory Review Process
– Pillar 3 Market Discipline
8. Pillar-1
• Basel-II suggests that to take greater risk, a
bank has to hold greater capital so that it
could remain stable. Pillar 1 sets out the
minimum capital requirement which must be
observed by all banks.
• Minimum Capital Requirement is not the only
way to control risk associated with the bank.
To mitigate risks, bank should take further
actions.
9. Pillar-2
• The main objective of Pillar 2 is the compliance of
banks with the Basel-II requirements. According to
Basel-II supervisors have the job to monitor bank’s
capital adequacy and ensure that it is in accordance w
• Pillar 2 addresses risks which are either:
– Not fully covered in Pillar 1 (i.e. credit concentration)
– Not taken into account in Pillar 1 (i.e. interest rate risk,
strategic risk)
– External Factors (i.e. business cycle effects)
• There are four principles for central banks under Pillar
2
10. Principle-1
• Banks should have a process for assessment of
capital adequacy and a strategy to maintain
their capital. The process must have following
features.
– Board and Senior Management Oversight
– Sound Capital Assessment
– Comprehensive Assessment of Risk
– Monitoring and Reporting
– Internal Control Review
11. Principle-2
• Central Bank should review and evaluate the
internal capital adequacy assessments and
strategies, banks’ ability to comply and intervene
in case of non-compliance. Review and evaluation
may be done through
– On site inspection
– Offsite supervision
– Discussion with bank management
– Discussion with bank management
– Review of work done by external auditors
– Periodic reporting
13. Principle-4
• Supervisor should intervene at an early stage
to prevent capital from falling below minimum
level
14. Pillar-3
• Pillar 3 sets out the risk management disclosure
requirement to support Pillar 1 and 2.
• Basel-II committee suggests that disclosure
requirements should not conflict with the
accounting disclosures requirements which are
more broader in scope. Where accounting
disclosures fulfill the requirement of Pillar 3,
banks are allowed to mention only material
differences.
20. Pakistan’s Status
• Although the State Bank of Pakistan (SBP) is
not a member of the BIS and is not bound to
implement the new reforms, the SBP did
implement the Basel-II reforms in principle in
2005.
• Metrics instituted by Basel-II for the
measurement of risk are now in place.
• Instructions for compliance of Basel-III issued
on August 15, 2013
22. HISTORY
• BSD Circular No .05 of 2004 May 22, 2004 Rs.
1b
• BSD Circular No . 12 of 2004 August 25, 2004
1.5b
23. • BSD Circular No. 6 of 2005 October 28, 2005
Minimum Capital Deadline
a) Rs 3 billion By 31-12-2006
b) Rs 4 billion By 31-12-2007
c) Rs 5 billion By 31-12-2008
d) Rs 6 billion By 31-12-2009
26. The Express Tribune
September 21, 2013
In line with the Memorandum of Economic and
Financial Policies (MEFP) signed with the IMF,
the central bank is going to ask all private and
public-sector banks that do not currently meet
the requirement to raise capital latest by
December 2014 to achieve the minimum CAR
of 10% of their risk-weighted assets.
27. Points Ignored
• National interest seriously compromised
• National development needs
• Equity available for increased capital
requirement
28. Result
• Mergers and acquisitions of banks
• Mostly by foreign investors
29. Recommendations
• Tier based banking system
– Tier 1 – Fully compliant to Basel Accords
– Tier 2 – Compliance to Basel Accords voluntary