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 Articles
News

FDIC Consults on Approach to Resolution Planning for IDIs

FDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.

April 22, 2019 WebPage Regulatory News
News

FDIC Specifies Submission Timeline for FFIEC 031, 041, and 051 Reports

FDIC published the financial institution letters (FIL-21-2019 and FIL-22-2019) that offer guidance on submission of Call Reports FFIEC 051, FFIEC 041, and FFIEC 031 for the first quarter of 2019.

April 19, 2019 WebPage Regulatory News
News

US Agencies Propose to Revise Call Reports FFIEC 031, 041, and 051

US Agencies (FDIC, FED, and OCC) proposed to revise and extend, for three years, the Call Reports FFIEC 031, FFIEC 041, and FFIEC 051.

April 19, 2019 WebPage Regulatory News
News

US Agencies Propose to Amend Rule on Supplementary Leverage Ratio

US Agencies (FDIC, FED, and OCC) are proposing to revise the capital requirements for supplementary leverage ratio, as required by the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

April 18, 2019 WebPage Regulatory News
News

EP Resolution on Proposal for Sovereign Bond Backed Securities

The European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).

April 16, 2019 WebPage Regulatory News
News

HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%

HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.

April 16, 2019 WebPage Regulatory News
News

EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2

The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.

April 16, 2019 WebPage Regulatory News
News

PRA Finalizes Policy on Approach to Managing Climate Change Risks

PRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).

April 15, 2019 WebPage Regulatory News
News

PRA Seeks Input and Issues Specifications for Insurance Stress Tests

PRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.

April 15, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: First Update for April 2019

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

April 12, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2944