Required banking reforms are complex
sures the risk of insolvency from excessive losses — improved from 14.9% at the end of December 2010 to 15.1% at the end of December 2011.
The Tier 1 capital-adequacy ratio (CAR) of the banking sector increased from 11.8% to 12.2% during the same period. It was last at a little over 15% in aggregate for the major banks — only a very slight decline from a year ago. The minimum international standard is 8%, so local banks are doing very well on this measure.
Remember this ratio is tier one plus tier two capital divided by riskweighted assets — tier one capital is that which can absorb losses without a bank needing to cease operations (ordinary capital) while tier two provides lesser protection to depositors as it can only be used on a winding up (it refers to subordinated debt). To get the risk-weighted measure each loan is assigned a percentage and the higher the percentage the riskier the loan — for example, debt that does not have a credit rating is assigned 100% risk weighting, while it can be 150% for debt that is rated as junk. Government debt would be at 0% — meaning it is subtracted rather than added to the risk weighting.
What is important is a liquidity coverage ratio (LCR) was introduced on 1 January 2015, but the minimum requirement has been set at 60% and rises in equal annual steps to reach 100% on 1 January 2019. This graduated approach, coupled with the revisions made to the 2010 publication of the liquidity standards, are designed to ensure that the LCR can be introduced without material disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.
It should be stressed that the LCR standard establishes a minimum level of liquidity for internationally active banks. Banks are expected to meet this standard as well as adhere to the sound principles. Consistent with the committee’s capital adequacy standards, national authorities may require higher minimum levels of liquidity. In particular, supervisors should be mindful that the assumptions within the LCR may not capture all market conditions or all periods of stress. Supervisors are therefore free to require additional levels of liquidity to be held, if they deem the LCR does not adequately reflect the liquidity risks that their banks face.
In January last year, the Basel Committee on Banking Supervision published the Basel III leverage ratio framework and disclosure requirements together with the public disclosure requirements applicable as of 1 January this year. But since then the committee has received numerous requests about implementation, which prompted a further document that provided answers to the more common questions last month. In one of the answers it admits more detailed analysis will be needed on issues arising from foreign exchange risk due to currency mismatches between the market value of the derivatives and the associated cash variation margins. In another it says paragraph 25(ii) of the Basel III leverage ratio framework