Basel III, the upgraded version of recommendations on global banking laws and regulations, is preparing to phase in over the next two years, although Bangladesh has just started implementing the previous version. The country will at first assess the impacts of the new rules.

The new set of rules aims to strengthen the global financial industry to make it resilient, and ward off the 2008 - like global crisis.

Leading central bankers and national regulators who gathered in Swiss city of Basel last month said they were aiming to introduce proposals to strengthen international financial requirements on the banks by the end of 2012. The agreed reforms, which have been in the offing for several months, are part of a 'comprehensive response' to the financial crisis, the Basel Committee on Banking Supervision said in astatement.

The group of regulators and the Bank for International Settlements agreed that the banks would be required to lift their reserves substantially under the new rules, and increase key capital ratios. Most of the capital requirements are in relation to risk-weighted assets.

The Basel III reform would also be the cornerstone of the world's response to the financial crisis, and an endorsement by Basel's oversight body will pave the way for the G20 summit of leaders in November to give their seal of approval.

According to 27 top central bank governors, the new rules will go a long way in restoring the confidence lost during the latest financial meltdown.

Basel III has been debated, anticipated, and repudiated for months. Now that it has arrived, only the anticipation is over. The debating and disagreement continue.

Some say the move will certainly strengthen bank capital positions. However, there is a certain blithe assumption that raising capital requirements will result in an increase in bank capital. They say bank can raise capital ratios either by increasing capital or reducing activities.

However, the banking sector in Bangladesh has just started to implement Basel II-based capital regime from January 2010. And

the banks are not thinking of Basel III at the moment. But, Bangladesh Bank (BB), the central bank of the country, said it is closely following the ongoing revisions of the financial sector regulations in global forums.

Atiur Rahman, the BB governor, hinted that the new capital and liquidity requirements and regulatory and supervisory recommendations would be phased in gradually in the country's financial sector.

But he said these would not be implemented without assessing the impacts of the new rules.

“Basel III will be phased in gradually only after due assessment of their likely impacts,” Rahman said.

The basics of Basel III is that large internationally active banks will have to hold levels of common equity equal to at least 7 percent of their assets, much higher than the roughly 2 percent international standard or 4 percent standard for large US

banks.

Basel III also mentions, by 2015, the banks will have to begin building a 2.5 percent “buffer” of capital that must be fully in place by January 2019. If the banks fall below the buffer, regulators could force them to hold onto more of their earnings to augment their capital, which means the companies will have less money on hand to pay dividends or offer large compensation packages.

Local bankers also believe Basel III is stringent in terms of capital requirements. But they said Bangladesh is far away from implementing the new Basel rules.

Touhidul Alam Khan, executive vice president (corporate banking division) of Prime Bank, said the main feature of Basel III is that it increases the quality of tier I capital by eliminating some types of capital, such as contingent convertible bonds that used to be allowed in this category. The way

the banks determine how much capital reserve they need to set aside to recover from losses is the core concept of Basel III.

Tier I capital is composed of equity capital and retained earnings, while tier II is supplementary capital, and tier III is short-term subordinated debt covering market risks.

“As Bangladesh is in stage of implementing Basel II, we may think well ahead about tier 1 capital rule under Basel III, which ultimately will be fully effective from January 2015, with the capital conservation buffer phased in between January 2016 and January 2019,” he said.

Khan, an expert on Basel II in Bangladesh, also said, before implementing Basel III, top banks here have to take steps to restructure their own internal risk rating models to determine the risk weightings for their assets.

sajjad@thedailystar.net