Improving Banking Supervisory Mechanisms
In the OIC Member Countries
1
Executive Summary
This report investigates how OIC member countries can adopt future changes emanating from
banking sector reforms, particularly Basel III. Furthermore, the current state of the
supervisory practices in OIC countries is evaluated and most critically, possible effects of these
new changes in regulations on supervisory mechanisms are discussed. Policy
recommendations are proposed to tackle the more challenging regulatory environment for the
OIC countries. Our main findings are summarized below:
 Future of Banking Regulation
Banking Regulation after Basel III reform is going to be challenging in the near future.
More intensive capital and liquidity levels will be required in the banking business
across the globe. Thus, a better and more technical banking supervision is necessary to
comply with the future global banking environment.
 Quality and Adequacy of Capital in the Banking Sector
In all but a few countries, bank capital is quite satisfactory. It seems that OIC member
countries will experience a smooth transition to Basel III regulations. However, until
the end of 2018, the Capital Adequacy Ratio in global banking will be 10.5%. A rigorous
and coordinated Quantitative Impact Study (QIS) among member countries will be
useful to see how countries would fare under Basel III future requirements.
 Improving Deposit Insurance
By referring to the World Bank Regulation and Supervision Survey, which covers 180
countries, it has been found that OIC member countries need to improve their deposit
insurance systems. Improving and coordinating the deposit insurance system is an
important aspect of supervision for the member states.
 Complying with the Liquidity Requirements
Basel III imposes extra liquidity provisions measured by the new liquidity coverage
ratio (LCR), which requires banks to allocate additional liquidity by 2015. By looking at
the standard liquidity measures in OIC countries, some member states might need to
add more liquidity provisions in their banking systems. On average, liquidity side
would constitute the most demanding side of regulations for OIC countries as discussed
in the Islamic Financial Stability Board’s most recent meeting. Countries should be
ready for necessary balance sheet allocations to comply with these new changes. With
exceptions such as Turkey and a few more countries, the average liquidity ratios may
require some additional liquidity provisioning in the member statess. The Turkish
Banking Regulatory Authority was one of the first supervisory authorities, which
required a liquidity provision before the credit crisis of 2008. This may also pose a
problem for Islamic banking, since liquidity of the short-term funding market is very
tight.
 Coordinating Home/Host Supervisory Activities
Supervisory mechanisms of OIC countries should also consider the coordination
between home and host supervisory activities, since implementation of many of the
future and present regulations requires different mechanisms for home and host
countries. The Bank for International Settlement puts an important weight on
minimizing the complications between home and host supervisory authorities.