General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
August 29, 2018

BIS published a speech—by Mahendra Vikramdass Punchoo, the Second Deputy Governor of the Bank of Mauritius (BoM)—on the impact of Basel III reforms in the implementation of Basel II/III in emerging market and developing economies. Referring to the Basel III capital requirements, he highlighted that the higher common equity requirements would undoubtedly motivate shareholders, investors, and senior management, including Board of Directors, to take less risk. In the context of more stringent regulations, he also discussed the issues related to proportionality, economic viability of international operations of banks, stricter liquidity regulations, and impact of Basel III rules on trade finance.

According to Mr. Punchoo, in Mauritius, Basel III implementation has been a gradual process. The migration to Basel III capital requirements did not prove challenging, as nearly 90% of the banks' capital base was already in the form of tier 1 capital. In addition to the capital adequacy ratio, BoM introduced a capital conservation buffer of 2.5%, with its implementation staggered over a period of four years. A first tranche of 0.625% became effective on January 01, 2017; thereafter, on every January 01, the capital conservation buffer would increase by a tranche of 0.625% until it reaches 2.5% on January 01, 2020. In lieu of the countercyclical capital buffer, BoM introduced macro-prudential measures to limit the build-up of risks in three key economic sectors, which had witnessed unprecedented growth rates. These measures took the form of additional portfolio provision and higher risk-weights for specific categories of exposures, debt-to-income ratio, and loan-to-value ratio (LTVs were removed effective July 06, 2018). The LCR requirement in each significant foreign currency and on a consolidated basis was increased to 70% on January 31, 2018 and will be gradually increased every year to reach 100% by January 31, 2020. He then described the four adverse effects of the more stringent regulations, which he suggested the audience may wish to reflect upon:

  • The first remark highlights the growing recognition that the "one-size-fits-all" regulatory framework may not be optimal. Increasingly, in several countries, the principle of proportionality in regulation is being discussed and implemented. While there seems to be a strong case for proportionality in regulation, it is not simple to decide which features of Basel III should not apply and which features should apply to smaller banks. 
  • The second remark examined the unintended consequences of stringent capital requirements of Basel III. He exemplified that one European bank—namely Barclays Plc—has already exited Africa, including Mauritius. As per the Barclays CEO's review for the Annual report 2015, Barclays Africa has become "non-viable economically under current regulatory capital rules." He further mentioned that Barclays UK has to carry 100% of the financial responsibility for Barclays Africa and receive only 62% of the benefits. It is worth noting that Barclays UK has also exited its retail banking operations in Italy, France, and Pakistan and sold its Wealth & Investment Management business in Singapore and Hong Kong. Two other banks are in the process of exiting the Mauritian jurisdiction, as the respective Groups review the business models, refocus operations on their core markets, cut down costs by running down their less profitable and non-core business lines, thus reducing their geographical footprint and investing heavily in technology to optimize capital within Group. 
  • The third remark relates to the unintended consequences of the introduction of the Liquidity Coverage Ratio. Basel III restrictively defines liquidity as an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. In Mauritius where there are not enough liquid assets, banks have to keep large amounts of cash with the central bank at zero interest rates, instead of interest-earning placements with banks abroad. This could adversely impact customers, with banks charging higher fees, charges, and commissions.  
  • The final remark relates to the impact of Basel III rules on trade finance. Basel III could significantly undermine cross-border trade finance activities. Several provisions of Basel III, such as the leverage rule, risk-weighting requirements, and the liquidity rules raise the costs of banks' extending trade finance, which is already a low-margin business. The leverage ratio requires banks to hold top quality tier one capital equal to 3% of their total assets, including off-balance sheet assets such as trade finance commitments. In addition, because trade finance involves the importer's bank and the exporter's bank through a letter of credit, the changing risk-weight on loans between financial firms is likely to adversely affect trade finance. Finally, the liquidity rules, which require banks to match long-term obligations with long-term funding could also penalize trade finance.

Related Link: Speech

Keywords: International, Middle East and Africa, Mauritius, Banking, Basel III, Proportionality, LCR, Trade Finance, BoM, BIS

Related Insights
News

US Agencies Propose Revisions to FFIEC Reports 031, 041, 051, and 101

US Agencies (FDIC, FED, and OCC) propose to extend for three years, with revision, FFIEC 031, FFIEC 041, FFIEC 051, and FFIEC 101.

February 21, 2019 WebPage Regulatory News
News

OFR Adopts Data Collection Rule on Centrally Cleared Repo Transactions

OFR adopted a final rule to establish a data collection covering centrally cleared funding transactions in the U.S. repurchase agreement (repo) market.

February 20, 2019 WebPage Regulatory News
News

FHFA Finalizes Rule on Federal Home Loan Bank Capital Requirements

FHFA published, in Federal Register, the final rule to adopt, as its own, portions of the regulations of the Federal Housing Finance Board pertaining to the capital requirements for the Federal Home Loan Banks.

February 20, 2019 WebPage Regulatory News
News

PRA Publishes PS4/19 on Loss-Absorbency Mechanism Under Solvency II

PRA published a policy statement (PS4/19) that provides feedback on responses to the consultation paper (CP27/18) on adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down under Solvency II.

February 20, 2019 WebPage Regulatory News
News

SRB Publishes Framework for Performing Valuations in Resolution

The framework provides independent valuers and the general public with an indication of the expectations of SRB on the principles and methodologies for valuation reports, as set out in the legal framework.

February 19, 2019 WebPage Regulatory News
News

BIS Paper on Effect of Securities Lending on OTC Market Liquidity

BIS published a working paper that studies how securities lending affects over-the-counter market (OTC) liquidity.

February 19, 2019 WebPage Regulatory News
News

US Agencies Extend Consultation Period for the Proposed SA-CCR

US Agencies (FDIC, FED, and OCC) extended the comment period for a proposed rule to update their standards for how firms measure counterparty credit risk posed by derivative contracts.

February 18, 2019 WebPage Regulatory News
News

FED Extends Consultation Period for Stress Testing Rule

FED has published in the Federal Register a notice proposing amendments to the company run and supervisory stress test rules.

February 15, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for February 2019

EBA published answers to two questions under the Single Rulebook question and answer (Q&A) updates for this week.

February 15, 2019 WebPage Regulatory News
News

SEC Proposes Rule on Risk Mitigation Techniques for Uncleared SBS

SEC proposed a rule that would require the application of specific risk-mitigation techniques to portfolios of security-based swaps (SBS) that are not submitted for clearing.

February 15, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2623