Suspect charged after Vancouver car ramming leaves 11 dead    Suspect in killing of general claims he was paid by Ukraine    North Korea confirms troop deployment to Russia for first time    Rock & Roll Hall of Fame picks Outkast but not Oasis    400-800 year old giant coral colony discovered within AMAALA waters in the Red Sea    Makkah police arrest Yemeni and Egyptian suspects of fake Hajj campaign    Kafalah grants 1,900 loan guarantees worth over SR4.8 billion to SMEs during 1Q 2025    Council of Senior Scholars reaffirms performing Hajj without a permit is a sinful act    HR Ministry launches 'Ajeer Al-Hajj' service for seasonal work during Hajj 2025    stc reports strong first-quarter 2025 results with 11% rise in net profit    King and Crown Prince offer condolence to Iranian president over the deadly port explosion    Saudi Awwal Bank records SR2.1 billion net profit after zakat and income tax for 1Q25    Virgin Atlantic celebrates one month of nonstop service between London and Riyadh    Al Ahli cruise past Buriram into AFC Champions League Elite semi-finals    Duran leads Al Nassr past Yokohama Marinos into AFC Champions League Elite semi-finals    Saudi orchestra to perform at Sydney Opera House in May    Al Hilal thrash Gwangju to reach AFC Champions League Elite semi-finals    Saudi Theater Commission launches its Work and Learn Project in UK    The season has begun — and one comment shook us all    Average life expectancy in Saudi Arabia rises to78.8 years    Pakistani star's Bollywood return excites fans and riles far right    Veteran Bollywood actor Manoj Kumar dies at 87    Bollywood actress vindicated over boyfriend's death after media hounding    Grand Mufti rules against posting prayers and preaching in mosques on social media    Exotic Taif Roses Simulation Performed at Taif Rose Festival    Asian shares mixed Tuesday    Weather Forecast for Tuesday    Saudi Tourism Authority Participates in Arabian Travel Market Exhibition in Dubai    Minister of Industry Announces 50 Investment Opportunities Worth over SAR 96 Billion in Machinery, Equipment Sector    HRH Crown Prince Offers Condolences to Crown Prince of Kuwait on Death of Sheikh Fawaz Salman Abdullah Al-Ali Al-Malek Al-Sabah    HRH Crown Prince Congratulates Santiago Peña on Winning Presidential Election in Paraguay    SDAIA Launches 1st Phase of 'Elevate Program' to Train 1,000 Women on Data, AI    41 Saudi Citizens and 171 Others from Brotherly and Friendly Countries Arrive in Saudi Arabia from Sudan    Saudi Arabia Hosts 1st Meeting of Arab Authorities Controlling Medicines    General Directorate of Narcotics Control Foils Attempt to Smuggle over 5 Million Amphetamine Pills    NAVI Javelins Crowned as Champions of Women's Counter-Strike: Global Offensive (CS:GO) Competitions    Saudi Karate Team Wins Four Medals in World Youth League Championship    Third Edition of FIFA Forward Program Kicks off in Riyadh    Evacuated from Sudan, 187 Nationals from Several Countries Arrive in Jeddah    SPA Documents Thajjud Prayer at Prophet's Mosque in Madinah    SFDA Recommends to Test Blood Sugar at Home Two or Three Hours after Meals    SFDA Offers Various Recommendations for Safe Food Frying    SFDA Provides Five Tips for Using Home Blood Pressure Monitor    SFDA: Instant Soup Contains Large Amounts of Salt    Mawani: New shipping service to connect Jubail Commercial Port to 11 global ports    Custodian of the Two Holy Mosques Delivers Speech to Pilgrims, Citizens, Residents and Muslims around the World    Sheikh Al-Issa in Arafah's Sermon: Allaah Blessed You by Making It Easy for You to Carry out This Obligation. Thus, Ensure Following the Guidance of Your Prophet    Custodian of the Two Holy Mosques addresses citizens and all Muslims on the occasion of the Holy month of Ramadan    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



GCC banks face $27b shortfall by '17
Published in The Saudi Gazette on 03 - 03 - 2014

JEDDAH – Thanks to astute oversight by regulators, GCC and Levant banks emerged from the financial crisis in better shape than many Western banks, but their liquidity and capital positions should not be taken for granted. Management consulting firm Booz & Company recently conducted a study of capitalization and liquidity levels at 64 regional banks which revealed that as many institutions face the prospect of capital and liquidity shortfalls in the near term, particularly as Basel III rules are phased in between 2013 and 2018. In response, banks will need to manage their capital and liquidity levels more proactively – and soon.
Since the crisis, capital and liquidity support from GCC and Levant regulators has helped keep the banking sector relatively strong. Across the region, governments acted fast to inject liquidity into the system by placing long-term government deposits into banks. In Bahrain, Oman, and Saudi Arabia regulators also lowered interest rates and modified reserve requirements to improve the liquidity situation. To support capital positions, Kuwait and the United Arab Emirates (UAE) made direct capital injections and Qatar purchased bank assets.
These measures had the desired effect.
Although the governments' capital and liquidity initiatives have helped keep regional banks solvent and strong to date, Booz & Company's study found that many of these banks could soon face capital and liquidity shortfalls.
To a large extent, the new capital and liquidity ratios under Basel III have not yet been finalized, but with the implementation phase around the corner, Booz & Company ran several scenarios based on the most likely new ratios. The findings were noteworthy.
According to the analysis, the new minimum capital requirements set by the Basel Committee and local regulators will significantly affect banks, including systemically important financial institutions (SIFI). Indeed, the new requirements are much more stringent, and they call for meticulous and recurrent capital planning that is integrated into the overall strategy of the banks.
“Based on 2012 performance, 15 of the 64 banks could fail to meet a capital requirement of 16 percent, and 29 of the banks could fail to meet a capital requirement of 18 percent,” said Dr. Mazen Najjar, a Partner with Booz & Company. “To get an idea of how banks would perform in the future, we also ran two economic scenarios for 2017: one assuming growth in line with the projected expansion in GDP and another assuming decelerated growth. The results for the downside scenario were sobering.”
In effect, under the downside scenario, 28 banks could fail to meet the 16 percent capital requirement while 39 institutions could fail to meet the 18 percent capital requirement.
The picture is similar, though somewhat better, when looking at core capital. For instance, based on 2012 performance, two banks could fail to meet a new core capital requirement of 9.5 percent, 11 could fall short if the level was at 12 percent, and 22 could fail were the level raised to 14.5 percent. In a 2017 downside scenario, 25 banks could fail to meet the 14.5 percent threshold.
Based on possible ratios and various economic scenarios, the capital shortfall increases from a total of about $11 billion in 2012 to a range of $12 billion to $27 billion in 2017. As a result, once these new requirements are set, the shortfall in the availability of capital that banks can use to meet their growth plans will be substantial.
On the liquidity side, Basel III introduces two new ratios – The Liquidity Coverage Ratio (LCR) and The Net Stable Funding Ratio (NSFR) – to improve the banking sector's ability to absorb shocks arising from financial and economic stress, thus reducing the risk of spillover from the financial sector to the real economy.
These two new ratios pose a number of structural challenges for GCC banks.
Booz & Company ran two scenarios for the liquidity coverage ratio, a conservative one and a more aggressive one. Using Basel III guidelines, the company used various haircut levels and other factors to set the conservative and aggressive ratios. It then tested each bank's ability to meet LCR requirements as they are gradually implemented from 60 percent to 80 percent to 100 percent. The different assumptions had an important impact on the number of banks that would potentially fail to meet the threshold, underscoring the need for banks to build greater resiliency measures into their liquidity management.
For instance, under the conservative scenario, based on 2012 data, seven of the 64 banks failed at 100 percent implementation; that number doubled to 14 using the aggressive assumption.
“In total, the liquid assets needed to satisfy the 100 percent LCR threshold range from $2.7 billion to $10.5 billion based on the conservative and aggressive scenarios,” added Dr. Najjar. “What emerges from our capital and liquidity study and the subsequent analysis is that a wide spectrum of preparedness exists among GCC banks. Among the 64 GCC and Levant banks studied, 16 have relatively strong capital and liquidity whereas 18 have relatively average capital and liquidity positions.”
The report also covered leverage ratios, but these posed no problem for any GCC bank due to high Tier 1 capital levels and limited off-balance-sheet exposures.
To avoid these shortfalls, GCC banks must begin to manage capital and liquidity ratios more proactively and rely less on reactive “helping hand” measures from their governments and regulators.
There are five strategic imperatives that all banks need to follow:
1. Integrate Bank-Wide Risk, Capital Planning, and Funding Management Strategies: Maximize value creation by striking the right balance between the strategic objectives, risk appetite, and capital and funding availabilities. Ensure integration and internal alignment among stakeholders by elevating the endeavor to the board and management levels.
2. Utilize capital effectively and efficiently: Identify the capital gap – the difference between capital availability and capital requirements – and identify internal and external sources for capital raising initiatives. Consolidate these findings into a holistic capital plan and mobilize resources for implementation.
3. Enhance funding and liquidity management: Identify the funding gap – the difference between funding availability and funding requirements – and identify sources of funding to bridge the gap. Consolidate these finding into a holistic funding plan. Establish a centralized, consolidated, timely view of the bank's liquidity positions to understand all liquidity needs and sources to avoid unexpected shortfalls or other liquidity surprises.
4. Integrate risk governance with the organization, culture and processes: Articulate and tailor risk processes, policies and procedures. This includes defining the end-to-end credit process; assigning clear roles and responsibilities; and, embedding the processes in policies and procedure manuals.
5. Invest in reporting, solutions, data and IT infrastructure: Produce reports and dashboards to support senior management and board decision-making. Create transparency around performance and risk-adjusted profitability at the group and subsidiary levels to improve measurement and increase accountability.
Basel III compliance, while important in the short term, is not the only reason for managing capital and liquidity more proactively. Longer term, banks must also engage in a holistic capital, liquidity, and risk transformation. The reasons to do so are compelling. Those whose growth ambitions lie overseas may find even tougher capital and liquidity requirements in these foreign markets. Moreover, to improve RAROC and continue to attract shareholder backing, banks need to deploy capital in the most productive ways possible. Ultimately, more proactive management and strategic integration of capital and liquidity is necessary if GCC banks are to fulfill their growth ambitions and compete on the global stage. –SG


Clic here to read the story from its source.