UAE banks to face chal­lenges in im­ple­ment­ing Basel III re­forms

The Pak Banker - - COMPANIES/BOSS -

As the UAE banks gear up to meet the Basel III cap­i­tal norms, a num­ber of in­sti­tu­tions are ex­pected to face chal­lenges in terms of prof­its, lend­ing ca­pac­ity and main­tain­ing and grow­ing mar­ket shares in the con­text of in­creased de­mand for cap­i­tal buf­fers, ac­cord­ing to ex­perts.

"For banks, do­ing noth­ing in the wake of Basel III is sim­ply not an op­tion," said Mad­hukar Shenoy, part­ner at PwC, Middle East, at the "Basel III: Im­ple­men­ta­tion and Chal­lenges" work­shop re­cently or­gan­ised by the Emi­rates In­sti­tute for Bank­ing & Fi­nan­cial Stud­ies.

In De­cem­ber 2015, the Cen­tral Bank of the UAE said it would start en­gag­ing with UAE banks to en­sure com­pli­ance with the Basel III reg­u­la­tions.

The aim, it said, is to fully im­ple­ment the new rules by end of 2018. Basel III is a set of re­form mea­sures aimed at strength­en­ing the regulation, su­per­vi­sion and risk man­age­ment to en­sure fi­nan­cial sta­bil­ity of banks.

There will be dif­fer­ent pres­sures from dif­fer­ent stake­hold­ers as the phased- in im­ple­men­ta­tion of the var­i­ous re­quire­ments is car­ried out.

For ex­am­ple, the re­quire­ment on cap­i­tal buf­fers will po­ten­tially put a strain on profit mar­gins, mak­ing it dif­fi­cult for banks to con­tinue to match share­holder re­turn ex­pec­ta­tions, said Shenoy. Banks, un­der Basel III, will be re­quired to hold a cap­i­tal "con­ser­va­tion buf­fer" of 2.5 per cent.

The other main chal­lenges, noted San­dra Wei­den­bach, Man­agerCon­sult­ing at KPMG, Lower Gulf, could in­clude con­trol and gov­er­nance frame­works, the or­gan­i­sa­tional and op­er­a­tional struc­ture and doc­u­men­ta­tion.

In deal­ing with the new set of reg­u­la­tions, Shenoy said, banks must con­sider care­fully four key im­pact driv­ers: op­ti­mal eco­nomic cap­i­tal al­lo­cated for each busi­ness; mix of li­a­bil­i­ties for sat­is­fy­ing the re­quire­ments re­lated to liq­uid­ity and lev­er­age; main­tain­ing and grow­ing mar­ket share and a sen­si­ble flow of div­i­dends to keep share­hold­ers happy.

"Pru­dent as­set al­lo­ca­tion based on risk-ad­justed rate of re­turn or eco­nomic profit is a good mea­sure to de­ter­mine if bank strate­gies are bet­ter aligned to risk and Basel III," Shenoy said, adding high qual­ity as­sets and credit will be in greater de­mand, with banks com­pet­ing with one an­other to at­tract the best cred­its to their books.

"Sim­i­larly, there is go­ing to be com­pe­ti­tion on at­tract­ing more sta­ble sources of funds, de­posits and sav­ings ac­counts to sat­isfy liq­uid­ity rules," he said, adding banks need to in­tro­duce some sort of mech­a­nism to deal with sit­u­a­tions that lead to cur­tail­ment of div­i­dends.

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