Tuesday, March 9, 2021

Does BoB need to implement Basel II?

In only two months, and that is if it sticks to its own deadline, the Bank of Botswana (BoB) will fully implement Basel II “in the best interests of accuracy and consistency of bank data.”

From Ivory Coast however, the African Development Bank (AfDB) has just put out a report that says that the rules suggested by the Basel Committee are less relevant for Africa.

“A more detailed view of the facts will note that the low integration of Africa in global finance means that Basel II and III rules are too complex for its banking systems. The lack of a large market for derivatives, the high liquidity of banks, and the recent improvement in governance seem to be sufficient to ensure the stability of the banking system in Africa. Also due to the complexity of Basel II and III ÔÇô risk models are very sophisticated even for banks in developed countries ÔÇô their implementation may just be very complicated due to the lack of human resource capacity and deficiencies in information technology,” AfDB’s researchers says in a report.   

Basel I, which was developed at the end of the 1980s and launched in December 1992, was designed to regulate global banking by imposing regulatory capital on them. The framework imposed a ratio that required that eight percent of capital covered the commitments of the bank. This was meant to allow banks to absorb unexpected negative shocks without damaging the economic system. Basel II, which was launched in June 2004, is organized under three pillars: equity, risk monitoring and transparency. Through this framework, banks may organize their internal risk assessment in order to ensure a proper monitoring of risks by themselves. While maintaining the eight percent threshold of total capital, Basel II incorporated operational risk (in addition to credit risk) and narrowed the definition of capital.

Beginning January 1 last year, BoB commissioned the parallel-run implementation of Basel I and Basel II. In the 2014 Supervision Report, BoB governor, Linah Mohohlo, says that the intention of this action was to assess the likely impact and implications of the new capital rules on banks’ capital and other financial soundness indicators.  

“On the basis of the evaluation and extensive consultation with banks on the results of the parallel run, it was agreed to fully implement Basel II on January 1, 2016, in the best interests of accuracy and consistency of bank data,” she says.

At this point in time, Mauritius and South Africa are the only African countries to have implemented Basel II. Most regulatory and supervisory authorities in Africa are still using the Basel I framework. The AfDB review says that while Africa is far from the level of financial development in the developed world, it does not have to ignore Basel’s principals.

“Since its banking system is quite liquid and well capitalized, regulatory and supervisory authorities should focus on improving the quality of assets, increase the transparency of financial transaction and continue to improve the governance of its banks, the training of its staffs and greater adoption of information technology,” the bank says.

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