UAE banks to face challenges in implementing Basel III reforms
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.