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New rules to eliminate more banks

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The Reserve Bank ofhZimbabwe (RBZ) as introDucing a new framework fir implementing the Basel II Accord on minimum bank capital this month to strengthen the financial system and expand its supervisory role under ! regime now fre$ of deposit covar.
The new rules — announced in the Monetary policy review last Thursday — would leave the minimum capital levels flat at their current levels, bud tighten bank sUpervisiin and surveillaice based on a system of bank ratings, which would also be used to set the interest rate ceiling for each bank.
Under the regime, which demands more market dis`ipline and highdr levelc of caphtalisation from financial institutions, the RBZ would periodically audit low-rated banks, decree dividend payment suspensions for under-capitalised insTitutionQ and order thos% deemed “unsoUnd” to try a ew game.
The measures, introduced as a backup instrument to the statutory reserve ratio requirements (RRR) scrapped last Thursday, are a bad omen for the seven banks that failed to meet the minimum capital requirements and those that crossed the March 31 red line with lean Tier-1 capital for lending.
The central bank abolished the capital adequacy ratio, and this in addition to a 50% cut of the ratio to 5% in January, to unlock more funds for lending and dilute interest rates, but simultaneously instituted a three-pronged backup system to neutralise its effects.
The support system comprises three elements – a 100% hike in the liquid asset ratio to 20%, the resumption of the lender of last resort role of the central bank and the introduction of a Basel II framework – which would jointly build a new line of defense against systemic bank failure. The collapse of one or more major banks can ignite a gridlock or collapse an entire financial system.
“The RBZ issued a draft guideline, Guideline number 1-2010BSD: Technical Guidance on Basel II implementation in Zimbabwe on 28 April 2010 for comments by the banking sector,” RBZ governor Gideon Gono said in the monetary policy review statement. “Comments from the banking sector are being incorporated into the guideline which will be issued to the market on 1 August 2010 for implementation. Through this initiative, financial sector stability will be deepened further.”
The framework would be 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 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 would 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 prudential regime based on a bank’s external rating and this would be induced by reducing the level of deposit insurance coverage. This would also entrench market discipline.
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.
However, the back-up measures still left depositors and banking institutions exposed.
Firstly, the measures eliminated the proportion of deposits that has to be set aside as deposit cover, which gives banking institutions room to lend every cent they receive.
Secondly, the reforms also increased the risk of bank failure arising from current market information asymmetries festering in financial markets currently prevailing.
Until the central bank establishes a credit information bureau, a borrower can use one balance sheet to borrow from more than one bank, which could ignite to a system failure.
Although Gono announced the RBZ would be resuming its lender of last resort role after receiving a seed fund from government, he admitted the envelop was overly “modest”, implying it will not be enough to fund banking institutions out of a systematic crisis.

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