Debt capital markets set to gain momentum
Isaac Pinielo | Friday June 26, 2015 15:41
The analyst, Ikanyeng Segonetso, said before the financial crisis, regulators moved in swiftly to draft rules and regulations intended to make the banking industry safer and more resilient to unexpected economic conditions.
He stated in his research paper titled, ‘Banking Sector to Stimulate Debt Capital Markets’ that in the recent global financial crisis, public funds were used to bail out failing banks.
In view of this, regulators have since requested banks to set aside more capital to cushion against unexpected losses, in a way, protecting customer deposits.
“Regulators took these unprecedented measures to ensure that failing banks draw into their capital funds to bail themselves out with no or little intervention from the national governments,” he said.
Segonetso further pointed out that the market is yet to see a lot of banks juggling for funds from the fund managers in the credit markets.
“Even then banks have an incentive to shrink and optimise their asset base as well. A wave of credit exposures for sale is coming, packaged in various instruments, some familiar and potentially some new ones,” he said. He, however, explained that the bottom line is that investors will have an increasing choice of credit instruments, but said understanding the risk versus return trade-offs of each instrument will become considerably more complex.
In addition, he stated that even though the trend has the potential to increase the total market capitalisation of corporate bonds, illiquidity of these instruments in the stock exchange will remain a challenge.
He said the development and implementation of global best practice standards for regulating banking systems, commonly referred to as Basel III on a global scale, has been a long process. He added that the implementation of Basel II/III, as is commonly known locally, is yet to take effect.
The Bank of Botswana (BoB), in consultation with the banking industry completed the draft Capital Measurement and Capital Standards for Botswana (Basel II/III) in December 2013, which aided the parallel-run of Basel I and Basel II/III since January 2014. This draft document sets out the proposed approach to be used in Botswana for the implementation of the Revised International Convergence of Capital Measurement and Capital Standards (Basel II) and selected enhancements under Basel III: A Global Regulatory Framework for more Resilient Banks and Banking Systems (Basel III).
Segonetso said it should be noted that these global standards of best practice do not prevent the banking system from collapsing, but rather they are meant to ensure that there is enough capital to guard against the unexpected losses. “How much capital is enough to hold outside of the minimum threshold is a debate that calls for another discussion,” he said.
On a global scale, he stated that tough new rules on capital and liquidity have been orchestrated by Basel Committee on Banking Supervision in consultation with the banking industry and other stakeholders.
These capital and liquidity requirements are expected to make the national financial systems more resilient to unexpected losses.
However, Segonetso indicated that these measures would come at a cost since it is expensive for banks to hold extra capital and to be more liquid. He said not only will it cost banks in setting aside capital, but also, costs of human capital spent on expertise and systems development to optimise capital for shareholders returns. “Most certainly, in the new capital regime, successful banks will be determined by the way in which they manage their capital funds. It is beyond serious dispute that, given the current liquidity situation, loans and other banking services will become more expensive and harder to obtain. The real argument is about the degree, not the direction,” he said.
The capital analyst said given the significant benefits of Basel II and Basel III, Botswana has adopted Basel II and selected enhancements under Basel III. He noted that the implementation of these new capital measurement standards were slated to commence in December 2014, together with the implementation of Pillar III, and culminating in the adoption of the advanced approaches by qualifying banks in 2017.
The implementation of Pillar II is scheduled to start in 2016, where banks will be required to submit to the Central Bank the first set of board-approved Internal Capital Adequacy Assessment Process (ICAAP) reports based on 2015 audited results.
According to the Bank of Botswana Banking Supervision Annual Report 2013, banks remained adequately capitalised in 2013, with solvency ratios well in excess of the minimum statutory and prudential capital adequacy requirements. The report shows that the total industry unimpaired capital increased by 7.7 percent to P7.2 billion compared to P6.7 billion in the year ended December 2012.
The general reserves increased by 67.2 percent, while the subordinated term debt declined by 22.3 percent respectively.
The banking system core capital increased to P5.6 billion (16.8 percent) from the levels of P4.8 billion in December 2012.
Capital adequacy ratios in the figure below shows that the core capital to risk-weighted assets ratio and capital adequacy ratio recorded marginal decreases to reach 14.9 percent and 19.3 percent, respectively in 2013. The core capital to unimpaired capital ratio increased from 71.2 percent in 2012 to 77.3 percent in 2013.