BB set to implement Basel-III from 2014
Bangladesh has started preparations to implement the Basel-III framework for bank companies from 2014 in line with the global standard, a top central bank official said Monday.
“We’ve started the ground work to implement the Basel-III for bank companies by 2014,” Executive Director of the Bangladesh Bank (BB) SK Sur Chowdhury told the FE.
The Basel-III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision.
The third of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis.
The Basel-III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
“Liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are pros and cons of the Basel-III framework,” Mr Sur said, adding that the central bank is providing training to the commercial bankers about the LCR and NSFR.
The LCR is a new liquidity standard introduced by the Basel Committee to ensure that a bank maintain an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for 30 calendar days.
The NSFR is a new standard introduced by the Basel Committee aiming to limit over-reliance on short-term wholesale funding assessment of liquidity risk across all on and off-balance sheet items.
As part of the preparations, the central bank has been organising a three-day-long training programme on liquidity risk management tools since Sunday. It will continue today (Tuesday), he added.
“We’re organising the training programme aiming to improve efficiency of the commercial bank officials about measuring, identifying and controlling of liquidity risks in line with the existing Basel-II and Basel-III frameworks,” Mr Sur noted.
He also said the central bank advises the bankers for taking necessary measures to submit liquidity profile reports in line with the BB’s prescribed formats.
Liquidity profile is a snapshot of a bank’s overall liquidity position in different time buckets.
“We need accurate liquidity profile reports for taking proper measures to keep the country’s money market stable,” the central banker said.
The training programme has been discussing implication of the credit-deposit ratio (CDR) to avoid liquidity risk.
The CDR is the proportion of loan-assets (investment-assets) created by the banks from the deposits received.
“Excessive credit growth, that is, when the credit growth is higher than the deposit growth, causes higher interest rates,” the BB said in a document, adding that this is simple, because banks are borrowing for a short term for credit expansion.
“When the payment is due they again borrow. But when most of the banks have the similar situation in their books, scarcity of fund arises which causes higher interest rates,” it noted.
Bangladesh is now implementing the Basel-II accord to consolidate capital base of the banks in line with the international standard.
It has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline.
Three types of risks – credit risk, market risk and operational risk – have to be considered under the minimum capital requirement.