Banks seek more time to comply with Basel III capital
SLBA writes to Central Bank seeking additional time for Basel III implementation Lists a number of factors why it finds it difficult to meet requirement as early as January 1, 2019 Banks seek CB’S intervention to stay capital conservation buffer at current 1.875%
Sri Lanka’s licensed banks have sought additional time to meet the higher capital adequacy ratios under Basel III, which came into full effect on January 1, 2019, Mirror Business learns.
To this end, the Sri Lanka Banks’ Association (SLBA) has written to the Central Bank seeking deferment of the enforcement of the highest capital adequacy thresholds by at least one year (January 1, 2020) instead of the accord’s January 1, 2019 deadline.
The banks in their letter sought the Central Bank’s intervention to stay the current capital conservation buffer (CCB) at 1.875 percent, which the banks need to maintain through 2019.
Under the current staggered approach for the Basel III implementation process, the CCB rises by 0.625 percent up to 2.5 percent, which in turn raises the minimum Tier I and Tier II capital adequacy ratios, from January 1, 2019.
The CCB is an additional requirement, which came with Basel III, to improve the quality of the banks’ capital.
According to the implementation timeline of Basel III, banks with assets less than Rs.500 billion must maintain a minimum of 8.5 percent in the Tier I capital adequacy ratio and 12.5 percent in the Tier II capital adequacy ratio, including the 2.5 percent CCB.
For banks with assets above Rs.500 billion—often called the domestic systematically important banks— must have a Tier I ratio of 10 percent and Tier II ratio of 14 percent, from January 1, 2019.
Common Equity Tier I (CET I) for both sets of banks remains at 4.5 percent and hasn’t been changed throughout the staggered period from July 1, 2017.
CET I includes pure equity, consisting of shareholder funds and retained earnings.
However, the deferral sought by the banks, if accommodated by the Central Bank, will reduce the minimum requirement under Tier I and Tier II for both sets of banks by 0.625 percent, until January 1, 2020.
In support of the sought deferment, the banks in their letter listed a number of factors why they find it difficult to meet the requirement as early as January 1, 2019.
Among the key factors cited in the letter were: rising non-performing loans, increase in loan impairments under the first time adoption of SLFRS 9 and imposition of debt repayment levy, which dampened the profits of the banking sector.
Banks also said raising the Tier I capital via share issues is difficult, considering the current capital market conditions.
Further, it was pointed out that it would be practically impossible to reduce the dividends to retain profits considering the less attractive return on equity and lacklustre performance in the stock market.
Finally, the letter also referred to the measures adopted by the Reserve Bank of India in the recent past to relieve the pressure on the banking sector.