State Bank of Pakistan Governor Dr Ishrat Hussain on Saturday sounded warning to banks and other financial institutions to implement Basel-II Accord in its full spirit, or be ready to go down. He said this while delivering presidential address at a seminar on 'Basel Capital Accord II: Requirements and Implications on Financial Institutions in Pakistan', at a local hotel.
The seminar was jointly organised by Taseer Hadi Khalid & company; Chartered Accountants, and KPMG Business Advisory Sdn Bhd, Malaysia.
Dr Ishrat Hussain was speaking on the revolutionary character of the Basel II Capital Accord as it has been touted as 'A Revolution Disguised as Regulation' and has umpteen advantages to the financial institutions. He urged the financial institutions to push ahead with its implementation with zeal.
He advised the concerned parties to hire appropriate staff and train them in the particular fields. If such staff is not available here it could be hired from abroad for a limited period of time, he added.
Hussain advised the audience to take these steps now. "We need the technique to identify the area and have to apply the data that could be acquired and validated", he said.
"All this Herculean task would need the support of IT system to expedite the work in a proper manner", the SBP Governor said.
He said that all this work on Basel Accord II would need a lot of money. Here the Board of directors will have to shake their pockets, he added.
He said that Basel II needed holistic approach, comprehensive programming and money to get the profits multiplied. Aggregation of the risk has to be mitigated by the companies.
He said that the State Bank would arrange seminars and workshops to keep the companies updated on the accord.
He mentioned a negative side of Basel II Accord, saying that banks would not be willing to extend loans to SMEs and agricultural sector.
He advised Pakistan Banking Association to arrange some brainstorming sessions to impart knowledge about Basel II to avoid mistakes in its implementation.
Dr John Lee, Executive Director and Head of Financial Services KPMG Business Advisory, Malaysia, gave a very informative presentation about Basel II and its implementation in Pakistan.
The Basil II Capital Accord has been evolved as a complex set of recommendations that will create a variety of regulatory compliance challenges for banks and financial institutions around the globe. With the publication of the "revised" Basel II framework for "International Convergence of Capital measurement and Capital Standards", (the "new accord"), together with local regulatory publications, the waiting period is over and banks need to spring to action.
Lee said that Basel II will stimulate a convergence of regulatory driven risk management towards economic driven risk management. It will enable the financial institutions to reduce the regulatory capital by using advanced risk management approaches. The Basel II will provide key planning points for financial institutions.
Dr Lee said Basel II has three pillars. These are the minimum capital requirements, supervisory review process and enhancement of market discipline.
Basel I risk capital charge is primarily focussed on credit risk and subsequently market risk (1996 Amendments). Under Basel II, the risk capital charges have been extended to cover all risks.
Lee said that risk weights are calculated using external ratings set by the regulator while the regulator defines the Credit Risk Mitigation Techniques. He said that though Basel II is not a law but a set of recommendations, its sterling qualities cannot be ignored.
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