COMCEC Financial Outlook 2018

In this part of the study, bank regulatory capital to risk-weighted assets, bank capital to total

assets ratio and banks non-performing loans to total gross loans variables are used to measure

financial stability of financial institutions in the OIC Member States.

Bank regulatory capital to risk-weighted assets

refers to the capital adequacy of deposit

takers. It is a ratio of total regulatory capital to its assets held, weighted according to the risk of

those assets. This ratio is used as an essential indicator to measure the robustness of the

financial institutions during financial shocks. Global financial regulatory institutions, for

example, the Bank for International Settlement (BIS), recommend financial institutions and

banks to hold an adequate amount of capital to protect from systemic risks.

As shown in the following figure, OIC-UMIG and OIC-HIG have the highest scores over the

selected period compared to the other income groups and the World average. This can be

explained by the robustness and strong asset structure of the banking system for these groups.

Figure 10: Bank Regulatory Capital to Risk-Weighted Assets (%)

Source: Authors’ calculation from the World Bank Database

Among the OIC income groups, OIC-LIG and OIC-LMIG have the lowest scores in regulatory

capital to risk-weighted assets which realized as 17 and 17.2 percent, respectively. Compared to

the other groups and the world average, these results make these countries more vulnerable to

financial stress

Another indicator used to measure the stability of the financial intermediaries is the ratio of

bank capital and reserves to total assets

. Capital and reserves include funds contributed by

owners, retained earnings, general and special reserves, provisions, and valuation adjustments.

Capital includes tier 1 capital (paid-up shares and common stock), which is a common feature

in all countries' banking systems, and total regulatory capital, which includes several specified

types of subordinated debt instruments that need not be repaid if the funds are required to

maintain minimum capital levels (these comprise tier 2 and tier 3 capital). Total assets include

all non-financial and financial assets. Average of the OIC-HIG countries shows better

performance than any other OIC groups and the World average.

OIC-LIG

OIC-LMIG

OIC-UMIG

OIC-HIG OIC-Average World Average

2012 2013 2014 2015 2016