Improving Banking Supervisory Mechanisms
In the OIC Member Countries
3
 How should the supervisory mechanism adopt the recent global changes in
banking supervision?
The new financial regulation requires various important changes for banking supervision.
Accordingly, following steps should be taken:
Supervisors’ knowledge and expertise on derivative and hedge accounting should be
enhanced. The leverage ratio requires accurate derivative asset calculations in
particular. Hence, banks’ financial disclosure for derivatives is a critical step for
banking supervision for the next period.
Concentration of deposit and loan portfolios needs to be monitored more closely. Since
many of the new regulations on liquidity (LCR) and credit risk calculations crucially
depend on these concentration measures, extra supervisory effort needs to be exerted.
Banks' internal risk measurement strategies need to be supervised more effectively
under Basel III regulations.
Static bank capital assessments need to change with the philosophy of ICAAP. In the
ICAAP, a bank defines and makes an assessment of the significant risks to which it is or
could be exposed. Therefore, supervisors should investigate the macro and banking
scenarios and corporate governance in the banks.
Dividend policy for the banks will become a more important area after Basel III. Capital
conservation buffers, especially, will be directly related to the retained earnings and
dividend policies of banks. Therefore, supervisory activities should be directly focusing
on banks’ dividend policies.
Under Basel III, the form of capital plays a very important role. More supervisory effort
should be devoted to deciding what can constitute Tier 1 capital.
As a conclusion, even though Basel III and other new regulations are very important
developments for the future of banking, a successful implementation of these
contemporary reforms should be supported with more technical supervision. OIC
countries may have to enhance their technical supervision capacity parallel to these
reforms. Since full implementation of Basel III will take time, countries have a relatively
long period to set up their supervisory mechanisms to adopt the future changes in
regulations.