Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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(2) Bank Loan and Loss Provisioning
Especially after Basel III, the relationship between non-performing loans and loan loss
provisioning will become more important. So bank regulators need to better supervise banks
to see the actual and potential credit losses reported properly.
(3) Dividend Decisions of Banks
Since capital conservatory buffers will be key in the new regulations, keeping capital in the
bank via retained earnings will be important. Therefore, supervisors will monitor banks'
profitability and dividend distribution policies. So, depending on the state of the economy and
the bank's profitability, supervisors should coordinate the dividend policies.
(4) Disclosing the risk management procedures with the public
For the new regulatory environment, risk management rules of banks should be better
understood and supervised. Banks should better define and classify their risks. The risk limits
should be determined by bank management. More importantly, bank management should
define the action plan to take if risk limits are exceeded. Supervisors should be involved with
all these procedures and try to share these rules with the public.
(5) Supervising the quality of capital
With Basel III, the quality of capital will be another critical parameter. Banking supervisors
should monitor whether subordinated debt or similar source of funds is allowable as part of
capital. This is extremely critical since Tier 1 Capital will be the main source of bank capital in
the new regulatory framework.
(6) Supervising non-risk-based measures: Leverage ratio
As mentioned before, the efficiency of risk-based capital measures has been criticized during
the recent credit crisis. Therefore, regulators developed a simple non-risk-based measure
called the leverage ratio. For OIC member states, monitoring the leverage ratio in the banking
sector will be the new norm in banking. The volume of off-balance-sheet assets and the use of
derivative products are relatively limited in OIC member states. As a consequence, the new
requirement of the leverage ratio can be satisfied by OIC countries. However, to value some of
the off-balance-sheet items might require some challenges. Particularly, the accounting
practice of derivative products and marking-to-market of various financial assets can be
complicated for some members. A further collaboration within members would be extremely
helpful for all angles.
(7) Systemically important banks
New supervisory activity after Basel III will require an additional task, which is to choose the
Domestic Systemically Important Banks (DSIBS). This will be a newer task for the banking
supervisors of OIC member states.
As a conclusion, banking supervision after Basel III will be quite different. We have discussed
the SWOT analysis of the banking supervision practice in OIC countries. However, Basel III and
other new global banking regulations will further change the supervisory mechanism after
2015. Supervisory mechanisms should follow these new changes and adopt these changes for
the OIC member countries.