Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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 A new 2.5% capital conservation buffer will be introduced, as well as a zero to 2.5%
countercyclical capital buffer. The overall capital requirement (Tier 1 and Tier 2) will
increase from 8% to 10.5% over the same period.
 More liquidity needed to be hold in the form of cash or High Quality Liquid Assets.
 Trading and use of derivative instruments will be restricted.
 More capital will be required against counterparty risk.
In general, banking activity will be more challenging and demanding after 2015 and onwards.
First, we focus on how USA and EU are tackling for this new financial challenge and second, we
analyze banking sector in the OIC member countries. In addition, more technical and forward
looking banking supervision will be necessary to handle the future state of banking
supervision. Enhanced cooperation within similar countries will be beneficial for a better
banking supervision. Exchange of ideas among OIC banking supervisory authorities will
definitely improve the quality of banking supervision. We will discuss various regulatory
issues on the selected OIC members compared to US and European banking system.
2.1 Recent Developments in the Banking Sectors in US and Europe
After the crisis in 2008, banking sector in EU area and US showed signals for a recovery,
however exhibited asymmetric responses during this phase, which mainly stems from the
structural differences. The asymmetric recovery of the banking sector mainly stems from the
structural differences between US and Euro area. Total size of the banking sector as a
percentage of GDP is 270% in the Euro area, whereas this ratio is 72% in US, which suggests
relatively more important role of the banking sector in financial intermediation in the Euro
area compared to the capital market based intermediation in US. Therefore, the regulatory
framework for the Euro area and implications of the new regulatory standards are expected to
induce asymmetric effects. The effects of the global crisis on the banking sector led to a
deterioration in asset quality and deleveraging which has put downward pressure in
profitability, followed by a decline in the return on equity ratios together with an increase in
capital ratios reflecting the efforts towards re-capitalization. During the recovery period,
return on equity started to improve, and at the end of 2013, average return on equity were 9%
and 2% in US and Euro area, respectively. Furthermore, the share to book ratio in US increased
to approximately 1 whereas it remained at 0.6 at the Euro area.
2.1.1 Recent Regulatory and Supervisory Changes in EU and US
After the financial crisis many regulatory and supervisory changes took place in EU and US. A
brief account of these changes is presented to give some insights for the future state of the OIC
member states.
Deposit Insurance in US
By Dodd Frank financial law, the federal government has permanently increased bank deposit
insurance to 250,000$, which was only 100,000 USD before the 2008 financial crisis in US. This
is an important policy change towards a stable banking system.
Selection of G-SIFI's
Financial Stability Board in 2014 has chosen various financial institutions as Global
Systemically Important Financial Institutions (G-SIFI's). As we discussed in the previous
section there were 5 buckets for each class of GSIFI's. There was no institution selected as a
bucket five institution. HSBC and JP Morgan Chase appeared as bucket 4 institutions, which are