Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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6. Policy Recommendations
We have investigated various macro and micro measures regarding the economy and banking
in various OIC countries. We have concluded that many of the selected OIC countries own
sufficient capital and conducted relatively healthy banking practice during the credit crisis in
2008. We have reached the following conclusions:
6.1 General Findings on OIC Banking
- Capital Requirements
Under new regulations, the quality of capital will be better than what is required under Basel
II. Banks need to put better quality of capital to comply with Basel III. Thus, supervisors should
ask banks how to comply with these new changes. Basically, the minimum capital adequacy
ratio will become 10.5% in 2019, which is 2.5% higher than the previous levels.
There are negative and positive aspects of these new capital requirements for the OIC
countries' supervisors. In general, similar to many countries in the world, OIC countries need
to inject more capital to comply with Basel III. Supervisory authorities should make a
coordinated effort to find out what is the total capital requirement for the sector and for each
bank. Our analysis shows us that, on average, an apparent deficiency in capital is not observed
for the selected OIC countries. However, there are various subtle points under Basel III capital
requirements. Accordingly, OIC supervisors may prepare a quantitative impact studies (QIS)
for capital requirements.
One positive aspect of the OIC countries’ capital is that, on average, the quality of bank capital
in these countries is better than that of Europe and the US. Tier 1 capital in OIC member states
is around 100%. This implies that, even though new capital injection may be necessary for
some countries, at least the form of the capital in these countries will be satisfactory. However,
OIC banking supervisors should pay more attention on the form of the future capital injections.
Under Basel III, common equity will be the major form of new capital. Capital adequacy
planning for adopting Basel III, especially when FED begins hiking the dollar interest rates, will
be a new challenge for the Banking supervisors in many OIC countries.
- Liquidity
Liquidity provisioning is also in the agenda of Basel III. Basel III calculations are difficult and
complicated, but supervisors can conduct a gap analysis to see whether the OIC banking sector
needs additional liquidity. By the macro data, we can see that some countries may need to
change their liquidity planning since average liquidity levels might be somewhat lacking in
their compliance with Basel III requirements. It is better to give a road map for international
investors and rating agencies as to how ready OIC countries are for Basel III requirements.
- Financial Stability, Macro prudential Regulations
In modern banking supervision, supervisors must be proactive and look for potential macro
risks. If they see any macro risk evolving, they should act to mitigate that risk before it is too
late. A general name for these activities is macro-prudential regulations. This concept is new
and different. OIC countries also face various macroeconomic challenges which may turn into
banking problems in the future.
There are two challenges for OIC countries. First, countries need to decide how to coordinate
the actions of central banks and banking supervisors. Countries need to decide how to avoid
conflict of interest if it arises. The UK has a different model than that of the US. Europe