Islamic Financial Stability Forum held
Basel III regulatory reforms and Islamic finance discussed
KUALA LUMPUR, April 15: The Secretary-General of the Basel Committee on Banking Supervision (BCBS), William Coen, delivered the main presentation at the 15th Islamic Financial Stability Forum, themed “Global Regulatory Reforms: What More Needs to be Done and the Challenges for Emerging Economies and Islamic Finance”.
In his presentation, Coen touched upon the characteristics of the regulatory framework leading up to the global financial crisis, and the effects the crisis has had on the global economy. Coen further remarked on the progress made on regulatory reforms through Basel III, which included improving the quality of bank capital, increasing level of capital requirements and the introduction of international liquidity standards, among others. He also pointed out the willingness and desire of the governing body of the BCBS and all parties involved in the reform process to complete and finalise these reforms.
On the current calls for the BCBS to take a regulatory pause or sabbatical, Coen reflected on the Committee’s work on Basel II and the regulatory pause that followed in 2006, where he noted that the financial crisis took place only a year later. He also added, “our work on liquidity and definition of capital, had we started that work sooner, we could have mitigated, somewhat, the effects of the crisis.”
Several areas which required further work by BCBS were highlighted by Coen, including the regulatory treatment of forward-looking Expected Credit Losses (ECL) approach of accounting provisions for which BCBS has provided a shortterm guidance. Coen pointed out that BCBS has been advocating the use of ECL, expressing his belief that accounting standard-setting bodies have moved in the right direction with ECL, and that BCBS would continue to work on this issue. He also discussed the work performed by BCBS on the regulatory treatment of sovereign exposures, describing the process as “a careful, gradual and holistic review” while highlighting issues relevant to sovereign exposures, such as the definition of sovereigns, and possible policy options to address these risks. As part of its drive to simplify its regulatory framework, Coen discussed BCBS’ work to revise the market risk framework and other efforts of the Committee on shadow banking.
Improving supervision globally was the original reason for the formation of the Basel committee, according to Coen, with corporate governance being considered an important facet of BCBS’s work to promote strong supervision. Discussing Fintech, Coen noted its importance from a supervisory perspective, commenting that while it wasn’t possible to regulate every risk, it was possible to better supervise these risks. He also expressed his view that there was always a danger to overregulate or supress innovation and did not expect BCBS to regulate Fintech, but that the Committee would work with supervisors to ensure businesses have appropriate information technology systems and governance to ensure customer data is safeguarded. Coen also briefly highlighted BCBS’ Risk Management Principles for Electronic Banking (2003) as relevant to cyber risk, noting that this guide was still applicable today, and could be updated.
Speaking on the need to ensure full, timely and consistent implementation of BCBS’ guidelines, Coen stressed the importance of well-developed rules and the role that quantitative-impact studies could play in informing policy formulation. He also made reference to the BCBS’ Regulatory Consistency Assessment Programme (RCAP) as an example of the progress made by the Committee on that front.
Coen’s presentation was followed by commentaries by His Excellency Dr Ahmed Abdulkarim Alkholifey, Governor of the Saudi Arabian Monetary Authority (SAMA), and Professor Mohamed Azmi Omar, Director General of Islamic Research & Training Institute (IRTI), of the Islamic Development Bank (IDB) Group.
Regulations
Dr Alkholifey expressed his view that the high volume of regulations which have taken place after the global financial crisis of 2008 would pay off, in spite of calls for a regulatory pause and increased compliance cost for international banks. He agreed with the approach the BCBS is taking towards Fintech, and acknowledged the efforts made by the Committee to handle macro and micro issues of emerging markets, as well as accounting provisions, sovereign exposures, market risk framework and step-in risk. He hoped that BCBS’ standard on sovereign exposures would be carefully calibrated due to its significant implications on emerging market countries and their credit ratings. On the regulatory treatment of accounting provisions, Dr Alkholifey agreed that this accounting standard might have significant impact on banks, and shared the results of an impact study which was conducted in Saudi Arabia, where an increase in general and specific provisions was found to impact capital adequacy ratios (CAR) by about 0.3 percent, bearing in mind that Saudi banks had, on average and based on latest numbers, a CAR of about 19 percent.
Dr Alkholifey also recognised that, in emerging markets, banks’ profitability was affected by the drop in commodity prices and unconventional monetary measures, leading to government spending cuts and increased debt issuance — measures taken in Saudi Arabia as well, albeit with debt standing at only 16 percent of Saudi GDP, in comparison to an average of over 200 percent globally. He also referred to the impact on liquidity and SAMA’s corresponding intervention to ensure the Saudi banking system remained sufficiently liquid. On supervision, H.E. shared SAMA’s experience in prioritising governance and oversight, core risk models, financial awareness and consumer protection and other areas such as banking conduct and fintech, in addition to anti-money laundering. He also expressed SAMA’s support for further work on fintech, agreeing with Coen’s statement that no regulations could cover all fintech risks, especially that fintech advanced at faster rate than regulators were able to address it. He further highlighted that in Saudi Arabia, a “sandbox” was established to enable fintech market players to experiment. He hoped that fintech would flourish but not at the expense of regulatory oversight or banks. He also shared his views on cyber risk, noting it as an important issue that SAMA took seriously, even as the financial sector in the Kingdom was largely unaffected by cyberattacks.
Dr Alkholifey also commented on the implementation of international reforms. He acknowledged the importance of the RCAP and SAMA’s support for the programme, and referred to Saudi Arabia’s experience of having undergone an RCAP, in which Saudi Arabia was found compliant with capital requirements but only largely compliant with Liquidity Coverage Ratio (LCR) rules despite having an LCR of 180 percent. He regarded this as an example that BCBS could overlook the requirements of emerging markets especially that many emerging markets did not have large, deep and liquid capital markets. He concluded by expressing SAMA’s support for current regulations by BCBS and raised a question on the right benchmark that could enable the enforcement of stringent banking regulations without jeopardising the ability of banks to service the economy.
Professor Dato’ Mohamed Azmi Omar highlighted that there were at least 10 countries in which Islamic banking was considered systemically important and suggested that financial infrastructure institutions, such as the Islamic Development Bank (IDB), the Islamic Financial Services Board (IFSB), the World Bank Group and BCBS, could put together their resources and expertise to facilitate and support member countries in the efficient implementation of global regulatory standards, including those issued by the IFSB and BCBS. He also highlighted the risk-sharing element in Islamic banking, and urged further consideration on the manner in which it can be implemented given the high riskweights for equity instruments in comparison to debt as used by conventional banks. He also discussed several issues relevant to Fintech, including its possible role in financial inclusion for faith-sensitive consumers, in controlling credit creation and in linking financing to real economic activities. Other Fintech issues noted by Professor Omar included potential unregulated capital outflows and money laundering.