Improving Banking Supervisory Mechanisms
In the OIC Member Countries
10
Timeline: Consequently, all banks are required to have additional capital tackling for pro-
cyclicality. A capital buffer will be added on capital in 2016. By the year 2019, an additional
capital adequacy ratio of 2.5% will be required as a capital buffer12.
Liquidity Provisioning
Basel III imposes two internationally consistent regulatory standards for liquidity risk
supervision. These are Liquidity Coverage Ratio and Net Stable Funding Ratio.
Liquidity Coverage Ratio
Basel Committee has developed the Liquidity Coverage Ratio (LCR) to promote the short-term
resilience of the liquidity risk profile of banks by ensuring that they have sufficient High
Quality Liquid Assets (HQLA) to survive a significant stress scenario lasting 30 calendar days.
Liquidity coverage ratio (LCR) measures the amount of high-quality liquid assets that can be
used to match short-term (30-day period) net cash outflows and requires the ratio of stock of
high-quality assets to the net cash outflows to be greater than a minimum. The time table for
LCR is presented below.
Basel III uses a gradual increase in its minimum LCR ratio, so banks need to adjust to this new
scheme in the next 5 years. Hence, as of 2015, at least 60% of a bank’s liabilities should be
covered by cash or cashable assets. This ratio will increase and reach 100% by 2019.
Regulators aim to ensure that a bank has enough high-quality liquid assets with to meet its
liabilities for a 30 calendar under a stress scenario. For emerging market countries there are in
fact two LCR ratios, one for local and one for foreign exchange positions.
Table 1: Minimum LCR Ratios Applicable Each Years
Year 2015 2016 2017 2018 2019
Minimum LCR 60% 70% 80% 90% 100%
Source:
Net Stable Funding Ratio (NSFR)
On the other hand, Net Stable Funding Ratio measures the amount of long-term and stable
sources of funds relative to the liquidity of assets. This measure requires a minimum amount
of funding to be stable over a time horizon of one year. In this regard, retail deposits and
savings account will be more critical for banks. Even though this requirement will take place
later than LCR, banks should get ready for these changes.
Leverage Ratio
Even though risk based capital has certain advantages, over the recent crisis, regulators have
witnessed some negative implications of this calculation method. Therefore, a plain and non-
risk based approach was also planned to be used as a complementary tool to risk based capital.
As the Basel Committee states in 2014 "An underlying feature of the financial crisis was the
build-up of excessive on- and off-balance sheet leverage in the banking system. In many cases,
banks built up excessive leverage while maintaining strong risk-based capital ratios. At the
height of the crisis, the market forced the banking sector to reduce its leverage in a manner
that amplified downward pressure on asset prices. This deleveraging process exacerbated the
feedback loop between losses, falling bank capital, and shrinking credit availability."
12See time table for Basel III.