By NEIL HARTNELL
Tribune Business Editor
Bahamian banks close to minimum regulatory capital requirements will be “stressed” by the implementation of new global standards in 2016, a Central Bank of the Bahamas report has warned.
The regulator, unveiling a study on the impact that the Basel II and III capital requirements will have on the Bahamian banking and trust industry, said that while the sector’s capital levels largely “remain robust”, a minority of institutions have work to do.
“As a result of the requirements of Basel II and III, the overall required regulatory capital levels of licensees increased,” the Central Bank said, adding that this had been driven by the inclusion of ‘operational risk’ in determining capital needs.
Changes to ‘risk-weighted asset factors’ will also impact Bahamian banks’ total capital needs when Basel II and III are implemented next year, although there was little change to capital that could be classified as either Tier 1 or Tier 2.
Yet the Central Bank also concluded: “The additional requirements of Basel II and Basel III are expected to stress licensees who were already near the minimum capital levels.”
This will likely require such institutions to raise more qualifying capital from new or existing shareholders, and the Central Bank said it will conduct a further study on the new standards’ impact in the 2016 first quarter.
The study surveyed 14 institutions, including all six commercial banks, using December 2014 data to assess whether Basel III would result in any “shortfalls” for Common Equity Tier 1 minimum requirements.
The impact of the change in risk-weighted assets and inclusion of operational risk for capital adequacy levels was also assessed.
“Overall, the findings suggest that banks’ capital levels remain robust under the Basel II/III framework,” the Central Bank said.
“This is attributed to the fact that generally, the banks’ Tier 1 and Tier 2 capital consists of common shares, share premiums, reserves, current profits and retained earnings – all largely consistent with the Basel III requirements.”
It added: “Capital levels for the Group [the 14 banks] fell by 2.53 per cent when calculated under the Basel III framework. Under the current Basel I framework, the group’s collective Capital Adequacy Ratio (CAR) stood at 26.9 per cent; under Basel III, the Group’s CAR stood at 24.4 per cent.
“CAR levels have decreased for all but five licensees within the group, but remained above the minimum levels. These decreases were driven principally by increases in total risk-weighted assets.”
The Central Bank said the average Common Equity Tier 1 ratio for the banks analysed stood at 22.8 per cent, compared to the minimum 4.5 per cent demanded by Basel III, “suggesting safe levels” of capital in the sector.
And, when Basel III’s 2.5 per cent capital conservation buffer (CCB) was added in, all banks still exceeded the higher 7 per cent Common Equity Tier 1 ratio.
Still, Basel III will likely dilute capital adequacy ratios, as the Central Bank said: “Under the current framework, the average CAR based on Tier 1 Capital stood at 31.9 per cent, while under the Basel III framework, the Group’s average Tier 1 Capital stood at 23.4 per cent, representative of a 8.5 per cent decline.
“Overall, the results of the analysis show that licensees within the Group would meet the minimum capital adequacy requirements under Basel III, factoring in both Tier 1 and Tier 2 capital.”
However, the results were slightly less impressive when the capital conservation buffer (CCB) was fully implemented.
“All banks within the group, with one exception, met the Common Equity Tier 1 requirement of 7 per cent without the need to increase their capital base. In the case of total capital (minimum of 10.5 per cent = 8 per cent +2.5 per cent), one bank fell short.”
That bank was not identified, and although many will point the finger of suspicion at Bank of the Bahamas, due to the fact its capital ratios were below regulatory minimums at end-October 2014, the $100 million bail out (temporarily) restored these in time for the survey.
“Assuming full implementation of both the CCB and Countercyclical Capital Buffers (CCCB), licensees within the group, with the exception of four banks, met the minimum 8 per cent requirement, plus the CCB (2.5 per cent) and the CCCB (2.5 per cent) requirement,” the Central Bank said.
“Total risk weighted assets increased across the entire group by 16 per cent. The main drivers of this increase relate to changes in the credit risk weighted assets and the operational risk capital charge.
“As a whole, the changes in risk-weighted assets had more impact on overall capital levels than changes to the definition of capital.”