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Improving Banking Supervisory Mechanisms
In the OIC Member Countries
44
4.2.2 Capital Regulations
The second category of core principles focuses on the risk management for the banking system
which is mainly reflected in capital requirements and risk weighted measures of assets. Our
focus in this section is on the evolution of the capital regulations for OIC countries, especially in
the aftermath of the financial crisis of 2008. Index for the stringency of capital regulations is
constructed based on the survey questions (1) Is the capital-asset ratio risk weighted in line
with the Basle I guidelines? (2) Does the minimum capital-asset ratio vary as a function of an
individual bank’s credit risk? (3) Does the minimum capital-asset ratio vary as a function of
market risk? (4) Before minimum capital adequacy is determined, which of the following are
deducted from the book value of capital? Market value of loan losses not realized in accounting
books? Unrealized losses in securities portfolios? Or unrealized foreign exchange losses? (5)
What fraction of revaluation gains is allowed as part of capital? (6) Are the sources of funds to
be used as capital verified by the regulatory/supervisory authorities? (7) Can the initial
disbursement or subsequent injections of capital be done with assets other than cash or
government securities? (8) Can initial disbursement of capital be done with borrowed funds?
Larger values of this index of bank capital regulation indicate more stringent capital
regulation. Capital regulatory index ranges between 0 and 10, where higher values indicate
stricter capital regulations.
Table 11: Capital Regulations (Selected OIC Countries)
Source: World Bank, Bank Regulation and Supervision Survey
We observe that capital regulations in OIC countries are stricter than EU-27 average and less
strict than US and there is an increasing trend for the stringency of capital regulations. In 2000,
capital regulatory index for OIC countries was lower than EU-27, reach their average in 2008.
US, however, as the country most seriously hit by the 2008 crisis, started to impose stronger
regulations for capital as of 2011.
Capital
Regulations
Survey Indonesia Kazakhstan Malaysia Nigeria Pakistan Turkey UAE Saudi Arabia Algeria
Selected
OIC
Average
Overall Capital
Stringency
2000 2
1
1
4
N/A.
3 N/A.
2
N/A.
2,2
Range 0-7
2003 N/A.
4
1
4
4
3
4
3
2,4
3,2
2007 5
5
3
3
7
3,6 N/A.
3
5
4,3
2011 7
N/A.
2
3
6
7
5
N/A.
N/A.
5,0
Initial Capital
Stringency
2000 3
2
2
3
N/A
1
3
2
N/A 2,3
Range 0-3
2003 3
3
2
3
2
3
3
1
1
2,3
2007 3
2
2
3
3
N/A 3
2
3
2,6
2011 3
N/A
2
3
2
3
3
N/A
N/A 2,7
Capital
Regulatory
2000 5
3
3
7
N/A.
4 N/A.
4
N/A.
4,3
Range 0-10
2003 N/A.
7
3
7
6
6
7
4
3,4
5,4
2007 8
7
5
6
10
N/A.
N/A.
5
8
7,0
2011 10
N/A.
4
6
8
10
8
N/A.
N/A.
7,7