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Dodd-Frank, Basel III and Solvency II will continue to dominate global regulatory landscape in 2012
 One
of the most significant regulations over the past year has been the introduction
of Basel III. For Indian banks, the regulation means that the capital required
(the equity component in particular) has become much larger. While the minimum
capital-to-risk-weighted assets ratio (CRAR) remains at 8%, the equity component
has been raised from 2% to 4.5%. In addition, there is a capital conservation
buffer of 2.5% composed of equity. In addition, two more capital components,
fully composed of equity, have also been prescribed - counter cyclical capital
within a range of 0- 2.5% and capital surcharge on Global Systemically Important
Financial Institutions (G-SIFIs) within a range of 1- 2.5%.
Indian banks will not be subject to capital surcharge on G-SIFIs at least for
quite some time and the countercyclical capital is not required on a continuous
basis. Therefore, the immediate concern is of meeting a much higher level of
equity component, which in effect translates to a higher figure on account of
the requirement under Basel III that all deductions are to be adjusted against
equity which were previously distributed equally between Tier I and II.
The Reserve Bank of India (RBI) and other banks will be estimating the capital
requirements under Basel III once the guidelines for implementation are released
by December 31, 2011. While implementing Basel III, the RBI’s main questions
will be if they should continue with more stringent capital regulations and
if should they adhere to the extended timetable or step up the implementation
schedule, given the fact that the banking system would be comfortable at the
starting point, i.e. at transition?
Basel III also requires a high level of liquidity to be maintained through a
pool of liquid assets. The definition of liquid assets is very stringent including
the requirement that they should be freely available. While the Indian banks
maintain a large pool of liquid assets through statutory liquidity ratio (SLR)
requirement, strictly speaking, these may not qualify as liquid assets under
Basel III because SLR requirement, being mandatory, needs to complied with at
all times. Compelling Indian banks to maintain more liquid assets in addition
to SLR would put them in a competitively disadvantageous position. RBI has,
therefore, to consider as to what extent the SLR can be reckoned towards Basel
III requirements for holding liquid assets.
Another significant development for Indian banks over the last year which will
continue into 2012 is the RBI’s directive for banks to build an MIS server
to generate returns automatically. The RBI has prepared an approach paper on
automated data flow (a straight through process) of information from the core
banking solution or other IT systems of commercial banks to the Reserve Bank.
The approach paper, inter alia, discusses the methodology to be adopted by banks
to classify themselves into a cluster based on its technology and process dimensions.
Accordingly, banks have been advised to conduct a self-assessment and furnish
the estimated timelines for the project.
2012 could see a lot more of evolving regulations and better supervision of
financial institutions by the regulators. In the Indian context, the key challenges
for banks in the next year would be the move towards implementation of Basel
III norms, increased monitoring of financial conglomerates and the optimum leveraging
of technology. “For Indian banks, one of the most significant regulations
over the past year has been the introduction of Basel III. The regulation means
that the capital required (the equity component in particular) has become much
larger. The Reserve Bank of India (RBI) and banks will be estimating the capital
requirements under Basel III once the guidelines for implementation are released
by December 2011," said Prabhat Gupta, Country manager, India, Wolters
Kluwer Financial Services. Another significant development for Indian banks
over the last year which will continue into 2012 is the RBI’s directive
for banks to build an MIS server to generate returns automatically. Banks have
been advised to conduct a self-assessment and furnish the estimated timelines
for the project.
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