New Basel proposals may help reduce banks� instability � analyst
Friday, April 15, 2016
Early last month, the Basel Committee on Banking Supervision proposed a plan to prohibit lenders from using internal models to calculate credit risk toward financial firms, equities and large corporations. The plan calls for banks to adopt a standardised method of assessing risk, known as the Standardised Measurement Approach (SMA), which replaces the Advanced Measurement Approaches (AMA). According to Segonetso, risk management for capital optimisation has taken centre stage in the modern banking environment post the collapse of the asset-backed securities market and the “poisonous” collateralised debt obligations of the 2008/2009 credit crunch.
“Following these events, the Basel Committee on Banking Supervision has been constantly orchestrating rules to curb similar cases in the future. For instance, stricter rules on how banks calculate the amount of capital they need to cover risks from fines or other parts of their operations has been enhanced, and are likely to see some banks need to bolster their balance sheets,” he said. While this phenomenon is viewed in some quarters as the Basel Committee’s attempt to limit the ability of the big banks to use their own models to cut the amount of capital they need, Segonetso said the changes in the operational risk framework are part of the committee’s aim to improve the simplicity, comparability and risk sensitivity of the frameworks. He noted that after the 2008/2009 financial crises, regulators found huge disparities in capital holdings because big banks used different models to assess risk. “As a result, banks are now being told to be more consistent and often increase the risk weightings they apply to their assets,” he said. Basel II only came into effect in Botswana at the beginning of this year whereas banks elsewhere have been calculating operational risk capital requirements for over 10 years since its implementation in 2006.
While the political shift brings hope for change, it also places immense pressure on the new administration to deliver on its election promises in the face of serious economic challenges.On another level, newly appointed Finance Minister Ndaba Gaolathe’s grim assessment of the country’s finances adds urgency to the moment. The budget deficit, expected to be P8.7 billion, is now anticipated to be even higher due to underperforming diamond...