Basel II Accord comes into force, banks ‘safe and sound’
The Reserve Bank of Zimbabwe (RBZ) has launched the Basel II Accord implementation framework, which sets new criteria for determining the minimum regulatory capital for banking institutions, to strengthen the financial system and expand its supervisory role over the industry.
The framework, which was introduced to the market as a working draft in August last year and came into force on Friday, carries forward the regulatory reforms that the central bank initiated six months ago when it abolished the capital adequacy ratio.
RBZ governor Gideon Gono, in a monetary policy statement issued last Friday, said the local banking sector had remained in a “safe and sound” condition, despite market illiquidity, low savings, volatile deposits and short-term loans.
The framework lays out new criteria for calculating banking institutions’ regulatory capital, sets the parameters for bank supervision and stipulates the minimum disclosure requirements.
The eligible elements of the prescribed minimum equity capital include, paid-up share capital, share premium, audited retained earnings and current year retained earnings verified by external auditors.
“The Basel II framework is accompanied by a detailed implementation roadmap that provides more specific tasks such as development of specific implemention plans, data requirements and submission of revised statutory returns,” Gono said.
Under the regime, which demands more market discipline higher levels of capitalisation from financial institutions, the RBZ would carry out on-site capitalisation checks, periodically audit low-rated banks, decree dividend payment suspensions for under-capitalised institutions and order those deemed “unsound” to try a new game.
The new rules have left the minimum capital levels at their current levels, but tightened bank supervision and surveillance based on a system of bank ratings, which would also be used to set the interest rate ceiling for each bank.
The framework has been abstracted from Basel II rules, a set of banking laws and regulations developed by the Basel Committee on Banking Supervision comprising the central banks and regulatory authorities of the world’s Group of 10 most industrialised countries.
The second Accord provides an international benchmark for central banks to develop rules on minimum capital requirements, market discipline and bank supervision, while Basel I rules focused narrowly on capital adequacy issues.
Zimbabwe’s Basel II framework will guide local banking institutions on recommended measures to manage capital and operational risk as well as market risk, laying out the recommended composition of minimum capital, setting the minimum ratio of liquid and fixed assets.
The rulebook would also seek to sterilise the country’s overly high interest rates by introducing a regime based on a bank’s external rating induced by reducing the level of deposit insurance coverage. This would also entrench market discipline.
The build-up to the new system started in July last year when the RBZ eliminated statutory reserve ratio requirements and raised the liquid asset ratio to 20% from 10% as a back-up instrument.
The Basel II framework is widely viewed as a more formidable line of defence against systemic bank failure than capital adequacy.
The collapse of one or more major banks can ignite a gridlock or collapse an entire financial system.
As at December 31, 2010, 19 out of 24 banking institutions, excluding POSB, Intermarket Banking Corporation and the defunct NDH Merchant Bank, were in compliance with the statutory minimum capital requirements.
Gono also urged banks to further risk management beyond regulatory compliance to avert a system failure akin to the US financial crisis by adopting the Enterprise-wide Risk Management concept.
The system has technical backing in the lender of last resort facility, which opens its doors to the banking sector tomorrow, though restricted to covering intraday credit-push deficit positions.
The restoration of the facility is seen breathing new life into the money market and inter-bank markets, currently dormant.
RBZ governor Gideon Gono, in a monetary policy statement issued last Friday, said the local banking sector had remained in a “safe and sound” condition, despite market illiquidity, low savings, volatile deposits and short-term loans.
The framework lays out new criteria for calculating banking institutions’ regulatory capital, sets the parameters for bank supervision and stipulates the minimum disclosure requirements.
The eligible elements of the prescribed minimum equity capital include, paid-up share capital, share premium, audited retained earnings and current year retained earnings verified by external auditors.
“The Basel II framework is accompanied by a detailed implementation roadmap that provides more specific tasks such as development of specific implemention plans, data requirements and submission of revised statutory returns,” Gono said.
Under the regime, which demands more market discipline higher levels of capitalisation from financial institutions, the RBZ would carry out on-site capitalisation checks, periodically audit low-rated banks, decree dividend payment suspensions for under-capitalised institutions and order those deemed “unsound” to try a new game.
The new rules have left the minimum capital levels at their current levels, but tightened bank supervision and surveillance based on a system of bank ratings, which would also be used to set the interest rate ceiling for each bank.
The framework has been abstracted from Basel II rules, a set of banking laws and regulations developed by the Basel Committee on Banking Supervision comprising the central banks and regulatory authorities of the world’s Group of 10 most industrialised countries.
The second Accord provides an international benchmark for central banks to develop rules on minimum capital requirements, market discipline and bank supervision, while Basel I rules focused narrowly on capital adequacy issues.
Zimbabwe’s Basel II framework will guide local banking institutions on recommended measures to manage capital and operational risk as well as market risk, laying out the recommended composition of minimum capital, setting the minimum ratio of liquid and fixed assets.
The rulebook would also seek to sterilise the country’s overly high interest rates by introducing a regime based on a bank’s external rating induced by reducing the level of deposit insurance coverage. This would also entrench market discipline.
The build-up to the new system started in July last year when the RBZ eliminated statutory reserve ratio requirements and raised the liquid asset ratio to 20% from 10% as a back-up instrument.
The Basel II framework is widely viewed as a more formidable line of defence against systemic bank failure than capital adequacy.
The collapse of one or more major banks can ignite a gridlock or collapse an entire financial system.
As at December 31, 2010, 19 out of 24 banking institutions, excluding POSB, Intermarket Banking Corporation and the defunct NDH Merchant Bank, were in compliance with the statutory minimum capital requirements.
Gono also urged banks to further risk management beyond regulatory compliance to avert a system failure akin to the US financial crisis by adopting the Enterprise-wide Risk Management concept.
The system has technical backing in the lender of last resort facility, which opens its doors to the banking sector tomorrow, though restricted to covering intraday credit-push deficit positions.
The restoration of the facility is seen breathing new life into the money market and inter-bank markets, currently dormant.
