He was speaking at a symposium on "Risk Strategies for Basel III Compliance and Beyond Extracting Business Value from Regulatory Change."
"Following the financial crisis, experts had said a long period of easy monetary policy that fueled accelerated economic growth," he said As one of the key responses for this situation, authorities developed the BASEL III Reforms Package that aims to strengthen global supervision of international banks and the banking system. Al-Hamidy also said the financial crisis has mutated into a fiscal crisis in some markets in Europe, once again threatening the viability of some global banks and causing the risk of contagion to other financial institutions and markets.
The crisis has developed despite strict supervisory measures undertaken by global central banks. "This drives home the lessons that strengthening banking supervision alone is not sufficient and that prudent fiscal and monetary policies are essential for a sound and resilient banking system," the vice governor said. Revisiting the evolution of the Basel II framework, which was published in 2004 with a tentative full implementation in 2007, he said consequently in that year a pertinent question was why did Basel II fail to prevent the financial crisis. The response, he said, was that apart from its slow and uneven implementation in the advanced markets, Basel II was flawed as it had failed to address some of the major supervisory weaknesses. These included the lack of a common definition of quality of capital, no limits on leveraging, no common standards for liquidity and a failure to recognize the excessive market risks.
"This brings me to the Basel III which not only addresses the shortcomings of Basel II but goes far beyond by introducing a variety of new concepts," the SAMA official said. He added that Basel III has introduced fundamental reforms, such as elevating the status of common equity capital, the concept of a conservation capital buffer and has recognized that liquidity is as important, if not even more important than, capital for safety and viability of banking institutions. The Saudi official pointed out that the global supervision is reverting back to fundamental values of prudence, conservatism and simplicity, adding that these are the same values that SAMA has always espoused and maintained and, therefore, for us the transition to Basel III raises no major concerns nor poses major challenges.
But despite a promising future, Al-Hamidy said that there are some challenges to be globally faced by banks and supervisors in the implementation of Basel III. They include the need to substantially raise the quality, quantity and international consistency of capital and liquidity. This may require banks to inject high quality fresh capital and also preserve the existing capital by limiting the payout of dividends and bonuses. Second, internationally active banks facing major capital shortfalls will have to revisit their business strategies on global presence and expansion plans. Third, implementation of Basel III will require banks to assess their existing capacity on estimation of additional capital and liquidity requirements. Fourth, new capital and liquidity rules are conceptually and technically very demanding.
Talking on SAMA's perspective in implementing Basel III, Al-Hamidy pointed out that Saudi Control Law (BCL) already provides for a clear definition of capital and also provides for legal capital, liquidity and leverage ratios and limits on large exposures. He said the BCL also allows SAMA to introduce appropriate and relevant international standard and best practices in Saudi Arabia, adding that SAMA was among the first group of non-Basel countries at that time to introduce Basel I framework in 1992 and the Basel II in 2008. Al-Hamidy reassured that Saudi banks already maintain a high level of core common equity capital, adding that the average following the introduction of Basel III has been about 17 percent, of which around 85 percent is core common equity. Saudi Banks, he observed, maintain a high level of liquidity, which has averaged over 30 percent over the past two decades. In order to cope with the challenges ahead, Al-Hamidy said the supervisors and central banks are required to have better management of systematic risks through coordination and cooperation in global standards and policies. He said the Basel III, when fully implemented, will contribute significantly in managing the systemic risks and strengthening of global financial system.
Islamic banking expert Nawaf Yousef Abu Hejleh, meanwhile, told Arab News that the system had proved its worth during the recent global slowdown. This could be attributed to a number of facts. Its capital assets have reached $1.5 trillion and are increasing at an annual average rate of 10 to 15 percent. Abu Hejleh also said the Islamic bank is based on real economic dealings when it came to financing. "In this system, there is what we call "Musharakah" or partnership where partners share the risks and the capital equally unlike other traditional banks that customers or debtors bear all the risks. Islamic banking will have a bright future because when it comes for supervision or controlling, there are extra measures. Even non-Muslims are now using the same system, he pointed out. There is now greater interest among many Westerners in the system than Arab countries, he said. Despite his optimism, Abu Hejleh said the Islamic banking system needs a qualified work force and financial experts to support its progress.
source: arab news