BoB extends Basel 11 deadline to 2014

Brian Benza
Staff Writer | Friday May 25, 2012 00:00

 

According to sources in the banking industry, the deadline, which was initially set for January 2012, has been extended to December 2013. This means that commercial banks will start to implement the more prudent capital reserve and risk management system dubbed Basel Two from January 2014, parallel to the existing Basel One.

'We have received communication from the central bank about the extension of the deadline up to December 2013. I believe they needed more time to consult with the banks, particularly the smaller ones, which do not have international parent companies that are already reporting Basel Two,' said a senior executive from one of the leading banks in Botswana.

The new systems will see banks that carry a lot of risk in their operations required to have a higher capital level in an effort to make banks more stable and less prone to instability. Currently, banks only consider credit risk in their lending operations. From 2014, they will be required to factor in an operational risks charge as well as a market risks charge in the capital reserves in a bid to cushion financial shocks in the industry.

'We are currently preparing our systems to make sure that we comply by the end of next year. We welcome this development as this will see more efficiently run operations needing less buffer mandatory capital levels,' said the executive.

In an earlier interview with Business Week, BoB deputy governor, Moses Pelaelo, said the adoption of Basel Two was in line with international best practice for credit, market and operational risk management as well as capital management and risk reporting. 'With the adoption of the new framework, we are asking banks to cater for other risks that are related to operations and the market they are operating in. On top of that, we'll be adopting a new data collection and publishing system where banks [will] be required to publish both the details of risky investments and risk management practices,' he said.

He added that although some banks, particularly subsidiaries of European or South African banks, had reportedly adopted this framework, Basel Two might present some challenges for smaller banks. It was for this reason that the regime would be implemented in phases ranging from basic, standard to advanced, Pelaelo explained.

'For some of the smaller Botswana banks, we will allow them to implement the basic regime, which is basically the entry point of Basel Two. But the more sophisticated banks such as the subsidiaries of multinationals will be required to comply with the advanced phase of the framework.'

From the nine licenced banks in Botswana, Standard Chartered, Stanbic, FNBB, Bank of Baroda, Barclays, and ABN Amro have parent companies in either South Africa, Europe or India where Basel Two is already in place.  The extension of the deadline will be a godsend for banks such as NDB, which are currently in the process of transforming into commercial banks and have set a December 2012 target to become compliant.

In the recent past, NDB CEO Lorato Morapedi told Business Week, ahead of the bank's privatisation slated for the second quarter of 2013, that the bank is working on improving its capital reserve and risk management system in preparation for applying for a commercial banking licence.

'We are targeting the end of 2012 to be Basel Two compliant. Before we can apply for a commercial banking licence, we need to be Basel Two-compliant,' she said. Pan African bank, BancABC has also said they are preparing for the new regulation. 'We are ready to join the implementation. The bank is already reporting Basel Two in Zimbabwe starting the beginning of 2012,' said Group CEO Douglas Munatsi. Officials of budding commercial bank, Capital bank have also expressed similar enthusiasm, saying their recently acquired flex cube banking system should make the adoption of Basel Two more uncomplicated. Although Botswana will only adopt Basel Two in 2014, its current capital adequacy requirement is already more than double the latest Basel Committee's minimum requirement, a phenomenon that BoB says helped the domestic banking sector to remain well capitalised, sound and profitable during the global financial crisis. In a bid to circumvent a possible repeat of the recent financial crisis, the Basel Committee on Banking Supervision reached a landmark decision two years ago known as Basel Three.  The decision translates into a more than doubling of the common equity component of capital for global banks from the current two percent to 4.5 percent plus, a new buffer of a further 2.5 percent, to reach a floor of seven percent.

The effective implementation of this new capital adequacy requirement is the period 2013-2019, and it is meant to make banks resilient to financial shocks and ensure a healthier banking sector worldwide. Any bank capital falling below the buffer zone will face restrictions on paying dividends and discretionary bonuses.