THE new global framework for capital requirements, Basel II, reduces credit supply as banks strive to increase the minimum capital requirements, a leading research firm has warned.
Victoria Mtomba
Basel II seeks to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.
In its report for the third quarter, MMC Capital said as a result of the new regulations, the participation of multi-lateral lending institutions was likely to be limited as the global banking sector comes under increased regulation.
“The effect of Basel 2 regulations on the local front is likely to result in reduced credit supply as banks will be striving to meet the increased capital requirements. This is likely to further drive down the prospects of the banking sector locally leading to a depressed performance,” MMC said.
Deposits to local banks, though on the increase, have been largely short term in nature. This means that banks cannot lend in the long term. As a result, local banks have resorted to offshore lines of credit for on lending to sectors of the economy.
MMC said banking sector deposits were expected to remain below $4 billion in 2013 due to limited foreign bank flows and the participation of multi-lateral institutions is expected to be limited as the global sector comes under increased regulation.
“Deposits are likely to remain transitory further reducing credit supply leading to high lending rates which will again prove to be negative for economic growth,” it said.
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“The interbank market is likely to remain constrained. In our view, the increased capital requirements as a result of Basel 2 and the RBZ (Reserve Bank of Zimbabwe) directive may lead to a number of banking institutions failing to meet capital requirements,” the research firm has shown.
MMC said default risks were expected to rise due to possible high lending rates and debt restructuring will be the major talking point in the last quarter this year, the firm revealed.
The research firm revealed that mineral revenues will remain depressed in 2013 as commodities continue to feel the heat of weaker global and Chinese demand.
“The mining sector, albeit the expected increase in royalties for gold and platinum, will in our view fail to access capital and in turn fail to capitalise on Zimbabwe’s low extractive cost environment relative to other countries in the fourth quarter of 2013,” it said.
“Platinum on the other hand may benefit from the resurgence in the automobile sector and the challenges that are being experienced in the South African platinum sector.”
