Don't Miss


Home   >   Market - Finance   >   Finance   >   Expert calls on banks to implement Basel II Accord

Expert calls on banks to implement Basel II Accord

By on October 26, 2012

In a bid to ensure the soundness and prevent future collapse of the financial system, both the listed banks on the Nigerian Stock Exchange (NSE) and unlisted banks operating in the country have been charged to implement the Basel II Accord.

Professor Gianfranco Vento, a consultant to the Central Bank of Nigeria (CBN), called on banks to embrace a global based approach to risk management that goes further than ensuring the soundness of individual financial institutions.

The consultant said this while speaking at the Risk Managers Association of Nigeria (RIMAN), quarterly seminar with the theme: “Implementation of Basel II in the Nigerian Financial Sector.”

He said, “Risk based capital standards require banks to hold capital in relation to their risk exposure. The Basel I requires that banks maintain sufficient capital to absorb unforeseen losses.”

 

“It should be noted that Basel I, that is, the 1988 Basel Accord, primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt).”

 

The putting in place of the credit default swap following the Exxon Valdez incident helped large banks hedge lending risk and allowed banks to reduce their own risk to lessen the burden of these tiring limitations, therefore Banks with international presence are required to hold capital equal to 8 per cent of the risk-weighted assets.

 

Suggesting the way forward for the implementation process of Basel II in Nigeria, he said, “The preparation of a comprehensive and detailed regulatory framework is required to clarify and critically adopt the base II and III principles of the local context”

 

Vento, explained that Basel II uses a “three pillars” concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline.

 

He said, “The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.”

 

“The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.”