Banks step into Basel II

Bangladesh entered the Basel II regime, the latest version of risk-based capital standards set for banks worldwide, on the first day of 2010.
In a circular on Tuesday, the regulator, Bangladesh Bank, reminded all scheduled banks to follow the guidelines on risk-based capital adequacy (RBCA) from January 1.
“Accordingly, instructions regarding minimum capital requirement (MCR), adequate capital and disclosure requirement as stated in the guidelines have to be followed by all scheduled banks for the purpose of statutory compliance,” the BB said.
According to the accord, a bank's minimum capital must be Tk 400 crore by August 11 next year. Of the amount, Tk 200 crore must be in paid-up capital.
On the other hand, the RBCA ratio has to be a minimum 10 percent of assets.
“This is good for the country's banking industry. An increase in capital will strengthen the sector,” said Muhammad A (Rumee) Ali, former deputy governor of the central bank and current chairman of BRAC Bank.
The Basel II accord has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline. And three types of risks -- credit risk, market risk and operational risk -- have to be considered under the minimum capital requirement.
Earlier in 2009, Bangladesh Bank allowed commercial banks to raise their capital even by subordinated debt.
Under the accord, risk of assets of a bank client must be rated by external credit rating agencies, otherwise provision will be higher -- at 125 percent instead of 50 percent which is for rated ones.
BB statistics show private and foreign commercial banks maintained the capital adequacy ratio of over 12 percent and 28 percent, as in June 2009. The ratio is slightly over 9 percent for state-owned commercial banks while it is 0.21 percent for state-owned specialised banks.
Touhidul Alam Khan, executive vice president (corporate banking) of Prime Bank, said Basel II has emphasised risk issues, which was ignored in Basel I.
“Basel II correlates with credit risk with and new focuses of operational risks. It also emphasised banks' internal risks and their choices in managing them to the amount of regulatory capital requirement they must maintain,” Khan said.
There are challenges for the banks to implement the accord. BB has made it mandatory for banks to rate corporate clients under Basel II.
“The credit rating of huge number corporate clients only by two agencies will be a big challenge for the banks,” said Rumee Ali.
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