KARACHI – State Bank of Pakistan (SBP) Deputy Governor Yaseen Anwar has expressed hope that the majority of banks operating in the country will comfortably meet the new capital requirements as well as the liquidity standards of Basel-III. ‘However, SBP will continue to work with those banks that may face some problem in achieving the standard promptly,’ he added.
Inaugurating a three-day ‘SAARCFINANCE Regional Seminar on Basel-III and Policy Response in SAARC Countries’ at the National Institute of Banking and Finance (NIBAF), he said that the banking sector of Pakistan enjoys a healthy capital adequacy ratio of 14 percent (aggregate) because of ‘our highly focused and strict banking supervision policies and oversight.’
‘This is a remarkable achievement given the fact that for the last two years, the sector has faced a poor economic environment and a marked rise in overdue loans,’ he said, adding it now appears that most banks have sufficient capital buffers to manage moderate shocks in credit and market risks.
‘Over the years, our banking sector has witnessed a significant change from a wholly government owned structure to the majority being privately owned,’ he said. He also noted that this shift was one of the main factors which led to improved performance of the overall banking sector, which is evident in increased Return on Assets (ROA) and Return on Equity (ROE) of the banking industry here, and the high growth in banking assets.
Moreover, the banking industry was opened to foreign investors which provided benefits such as new sources of capital, funding, expertise and competition, he said. ‘As such, this has helped the domestic banks to compete with foreign banks that possessed well established systems and a control mechanism, thus improving the overall soundness of the total banking sector and promoting competitive environment,’ he added.
The SBP deputy governor stressed that we implemented the Basel II capital accord in 2008. ‘It helped in enhancing the quality of risk management by tying regulatory capital more closely to institutions’ underlying risks and by requiring strong internal systems for evaluating credit and other risks,’ he observed.
He said that under Pillar I, ‘we have adopted simple approaches and we feel that in the area of advances, our banks still have a lot to do to improve the IT systems and data capturing requirement.’ ‘SBP has also addressed Pillars II and III. It has provided guidance on ICAAP (Internal Capital Adequacy Assessment Plan) to facilitate Pillar II (Supervisory review process) implementation in banks. Regarding Pillar III (market disclosure) banks’ disclosure requirement through published financial statements and other regulatory reports have been much expanded and thus strengthened over the years, he affirmed.
Anwar said that in the broad area of Risk Management, which ultimately feeds into Basel implementation, SBP has put in place detailed guidelines for banks, namely on Risk Management (issued in 2003) Internal Control (2004), Country Risk (2004) General Policy Framework (2007) and Stress Testing (2005). ‘In addition, we issued guidelines on Internal Credit Rating System (2007) and by September 2010, 90 percent of corporate borrowers were internally rated by banks,’ he emphasised.
‘This has gradually started improving the risk management practices at all banks under our oversight and will also help the banks which would opt for advance approaches in future,’ he said and added: ‘we have constantly been refining our regulatory and supervisory oversight through set of prudential regulations and other related instructions.’
‘For example, stress testing guidelines have been revised extensively and would be implemented in forthcoming months. This is in line with Basel III framework which provides for a bigger role for stress testing in the determination of capital buffers under Pillar 2,’ he added. The SBP deputy governor said that keeping in view the increased reliance on IT systems, most large banks have either already shifted to or are in the process of shifting to new core banking applications which will specifically cater to the future technology related requirements. ‘However, there is still a lot to be done to further improve the IT systems as well as the procedure for capturing data so as to better enable our banks to meet the minimum data or information requirement necessary for the effective implementation of the Basel capital accord “advance approaches” in a proactive and disciplined manner,’ he added.
Referring to the global financial crisis, he observed that in the absence of a global financial regulator, it proved difficult to ensure the safety and soundness of globally active financial institutions and as such governments had to step in to bail out their respective institutions. ‘However, these ‘contagion’ concerns can be minimised if we can keep local problems from turning global,’ he added
Anwar also stated that this would require both strengthening and harmonising financial supervision across the borders. Moreover, keeping in view the continuous upgrading of banking regulations and the challenges of adopting advance approaches, there is a need to have frequent interaction and cooperation among the regional countries. ‘This will help us all if we can openly share our knowledge and experiences at regional forums such as this and also devise strategies for region specific issues which may pose potential risks for each of our banking sectors,’ he added.
