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New Capital Adequacy Framework - Implementation in the Middle East (August 25, 2004)

Location: Basel
Author: RiskCenter Staff
Date: Wednesday, August 25, 2004

The new capital adequacy framework (Basel II) not only promotes improvements in risk management and regulatory capital allocation but also raises a variety of implementation challenges for both supervisors and banks.

Taking these challenges into account, the Financial Stability Institute (FSI), in coordination with the Basel Committee on Banking Supervision (BCBS), developed a Basel II Implementation Assistance Questionnaire. The objective of the Questionnaire was to identify Basel II implementation plans and to determine corresponding capacity building needs in the non-BCBS supervisory community. The results of the Questionnaire would allow the FSI to provide structured assistance to supervisory authorities intending to implement Basel II.

The Questionnaire was sent to 115 jurisdictions in Africa , Asia , the Caribbean , Latin America , the Middle East and non-BCBS Europe . Responses were received from 107 jurisdictions.

This paper presents the responses to the Questionnaire from a global perspective, highlighting some key regional trends. From these responses, 88 non-BCBS jurisdictions intend to adopt Basel II. Therefore, taking into account the 13 BCBS member countries, more than 100 countries worldwide will be implementing Basel II.

With regard to the timeframe for adopting the new capital adequacy framework, Basel II appears to be implemented widely across regions in 2007-09. During this timeframe, a little more than 5,000 banks controlling almost 75% of banking assets in 73 non-BCBS jurisdictions are expected to be subject to Basel II. One of the major drivers for moving to Basel II in non-BCBS jurisdictions seems to be the intended implementation of this framework locally by foreigncontrolled banks or local branches of foreign banks.

For Pillar 1 - minimum capital requirements - the foundation internal ratings-based (IRB) approach is envisaged to be the most used methodology for calculating capital requirements for credit risk (in terms of banking assets moving to Basel II). However, the (simplified) standardised approach ranks closely behind the foundation IRB.

As regards allocating capital for operational risk, the basic indicator approach is anticipated to be widely employed across regions. The most advanced methodologies for credit and operational risks are expected to be applied in a few cases across jurisdictions.

Several challenges were identified with respect to the implementation of Pillar 2 - the supervisory review process - and Pillar 3 - market discipline. The most common Pillar 2 challenge relates to acquiring and upgrading the human and technical resources necessary for the review of banks' responsibilities under Pillar 1.

An additional area of concern is the coordination of home and host supervisors in the cross-border implementation of Basel II.

With Pillar 3, the primary challenge seems to be that of aligning supervisory disclosures with international and domestic accounting standards.

In terms of capacity building issues, close to 9,400 supervisors worldwide are expected to need training on Basel II-related topics. Areas where most assistance has been requested relate to the implementation of Pillar 2 and the application of IRB approaches in calculating capital requirements for credit risk.

Based on the results of this Questionnaire, the FSI, in close coordination with the BCBS, will work to develop ways to assist supervisory authorities with Basel II issues. This could include high-level meetings to share regional experiences; seminars to disseminate technical expertise; and an online information resource - FSI Connect - to provide cost-effective capacity-building.

This paper constitutes the first part of a two-part summary of Basel II implementation plans and associated needs in non-BCBS jurisdictions. The second part includes six papers which provide an in-depth regional analysis of Basel II implementation issues in Africa , Asia , Latin America , non-BCBS Europe , the Caribbean and the Middle East .

To view the full paper, click here.

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