Arab Banking: Macro-Prudential Regulations – Part IV
Part IV of this seven-part series on Arab banking looks at the macro-prudential, or systemic, regulations surrounding the Basel III accords currently being introduced into the Arab banking system.
In the wake of the 2008–09 international financial crisis, the importance of macro-prudential regulation was brought to the fore. Complex financial linkages had induced spillovers across financial institutions and countries that affected macroeconomic stability and performance. These disturbances led to the reforms adopted under Basel III, notably the idea of building capital buffers over the up cycle to mitigate risks during downturns. In particular, Basel III puts stress on the Liquidity Coverage (LCR) and Net Stable Funding ratios (NSFR) (BIS 2011).
The Basel III LCR promotes the short-term resilience of a bank’s liquidity risk profile. It does this by ensuring that a bank has an adequate stock of unencumbered high-quality liquid assets that can be converted into cash easily and immediately in private markets to meet its liquidity needs for a 30-calendar-day liquidity stress scenario.
The NSFR is a long-term ratio that measures how much stable funding a firm has to endure a year-long liquidity crisis. The NSFR is structured to ensure that long-term assets are funded with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles. The NSFR aims to limit overreliance on short-term wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all on- and off-balance-sheet items. The NSFR approach offsets incentives for institutions to fund their stock of liquid assets with short-term funds that mature just outside the 30-day horizon for that standard (BIS 2010).
Since 2011, the Saudi Arabian Monetary Agency (SAMA) has been introducing the main elements of the Basel III framework in accordance with the timelines agreed upon by the Basel Committee. This includes introduction of the leverage ratio in 2011, the liquidity ratios in 2012, and the capital adequacy ratios in 2013. The leverage and liquidity ratios are in the monitoring phase, while the capital ratio is in its final form since the end of December 2012.
With macro-prudential regulations taking shape as a result of Basel III, the following Part V of this series examines the challenges to bank transparency, governance and discipline across the Arab world.
Read Part I, Part II, Part III, Part V, Part VI, Part VII
Wafik Grais is an International Senior Adviser specializing in Islamic finance, financial regulation, investment financing, private equity management, and corporate governance with expertise in SMEs and green growth financing. He was co-founder and chairman of Viveris Mashrek, a Cairo-based, financial advisory services company specialized in private equity investments in SMEs, licensed by Egypt's Financial Supervisory Authority. He spent 28 years in international finance notably with the World Bank in Washington DC where he held several senior positions both in operations and at corporate levels. He holds a Ph.D. in Economics.