Banks warm up to Basel II
Isaac Pinielo | Friday September 18, 2015 15:11
Basel II attempts to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institutional liquidity.
In preparation for the implementation of the new regime in January next year, banks have been on a parallel run with Basel 1.
A professional banker and investor, Ikanyeng Segonetso explained that this means that banks have been reporting their returns to Bank of Botswana based on Basel I and Basel II frameworks.
“That way, when Basel II comes into effect, there will not be a shock and variation in figures in the market,” he said.
He noted that some banks have sourced permanent resources to specialise on capital and Basel related matters, adding that in the new regime, “capital is king” and a scarce resource, which needs to be managed efficiently for the benefit of both investors and shareholders alike.
Segonetso also revealed that in 2013 the central bank in collaboration with KPMG ran Basel II/III training workshops for relevant members of the banking industry.
According to the banker, Basel II requirements are more stringent on capital and banks will have to set aside more capital to remain within the statutory limits. Supply of capital will come from retained income.
“Banks will have to increase their reserves and possibly revise their dividend policies by reducing dividend payout,” said Segonetso. He also added that to increase their capital base, banks will have to issue more subordinated debt which qualifies as Tier II capital.
Tier II capital is supplementary bank capital that includes items such as revaluation reserves, undisclosed reserves, hybrid instruments and subordinated term debt.
“The new regime calls for capital optimisation by controlling the bank’s risk weighted assets. Thus banks will have to write less risky assets,” he said.
Segonetso said as capital becomes costly for banks, they would have to drive capital planning and measure risk-adjusted performance for business units.