Basel III implementation on trackBanks bulking up capital base

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The BOJ expects to fully implement the Basel III framework over the next two years.

THE Bank of Jamaica (BOJ) says it is working to fully implement by March 2026 all three pillars of the new set of rules that require banks to hold more capital to provide a bigger safety net to protect themselves and their customers’ deposits from losses.

The rules are part of the Basel III framework developed as a response to the 2008 financial crisis by the Basel Committee on Banking Supervision of the Bank for International Settlements. They aim to make banks stronger and more resilient. The BOJ’s implementation by March 2026 will ensure that Jamaican banks meet international standards for capital adequacy and risk management. It implemented pillar one of the new rules in 2023, requiring banks to increase what is called Tier 1 capital, which is the equity held by banks. The Basel III framework requires that capital should cover at least 8 per cent of risk-weighted assets held by banks while the BOJ has set it higher at 10 per cent to provide greater cushion against losses.

“In relation to pillar one, we have already issued a standard of sound practice in terms of capital adequacy, which is one of the reasons why our system continues to be well capitalised. I think the capital adequacy ratio on average is between 14 to 15 per cent, which is four percentage points above the minimum, which is 10, and international standards is eight. Banks are adequately capitalised as they transition to the new standard,” said Dr Jide Lewis, deputy governor, at the BOJ’s quarterly press briefing last Wednesday.

The first pillar covers minimum capital requirements, the second pillar covers the supervisory review process, and pillar three covers disclosures and market discipline.

This resulted in capital adequacy requirements being more risk-sensitive and having different ways to determine capital requirements such as the standardised approach, internal ratings-based approach, and advanced measurement approaches. The scope of risk coverage was also expanded with liquidity coverage ratios also being added to ensure banks have enough high-quality liquid assets to cover net cash outflows in a 30-day stress period. A leverage ratio was also added, and is meant to limit excessive leverage in the financial system.

The European Union implemented all the Basel III reforms in late 2017, along with territories like Bermuda also following suite in the same year. The Bahamas implemented the Basel III framework in mid-2022, with other Caribbean states making progress. July 2025 is currently set as the Basel III endgame, which is the timeline for banks in the United States of America to comply with the new requirements and a multi-year transitional period.

In the case of Jamaica, phase I of the BOJ’s phased implementation plan was completed in 2023 as it implemented the minimum capital requirements for credit, market, and operational risk components under pillar I of the Basel III framework and a revised definition of regulatory capital. DTIs in Jamaica reported in parallel under the Basel II and Basel III frameworks for the transition period, which was set to last from July 2022 to June 2023, but that has been extended until the standard of sound practice on minimum capital requirements are codified in law. Until these legislative changes take effect, the implementation of the other pillars of Basel III can be impacted.

The BOJ is currently drafting these legislative changes along with the special resolution regime which was introduced to the senate in June 2024. The BOJ will also be adding the capital conservation buffer (CCB) and the countercyclical capital/systemic risk buffer (SYRB) under the minimum capital requirement changes document which is being brought to Parliament.

Banks, like any other business, have different risks to address in their operations. However, due to the importance of banks and protecting depositors’ funds, banks have to maintain certain amounts of capital and liquid assets (assets that can be easily converted to cash) to absorb shocks.

The Basel III framework adds two new buffers in addition to the higher capital adequacy requirements. The capital conservation buffer is first buffer and is comprised of common equity tier one capital (CET1), which includes the value of common/ordinary shares, retained earnings, and qualifying regulatory adjustments. The CCB is currently set at 2.5 per cent of risk-weighted assets, and should a bank fall below this mark, restrictions on capital distributions like dividends and share buybacks would immediately go into effect until the CCB is restored above that threshold. Banks generally must hold at least seven per cent of their capital as CET1 relative to their risk-weighted assets.

The systemic risk buffer is an additional safety net to absorb shocks by banks. It requires systemically important financial institutions (SIFIs) to hold additional capital on their books with the BOJ proposing 0 to 2.5 per cent of additional capital relative to risk-weighted assets as that additional buffer. The BOJ is currently in the process of developing a domestic SIFI framework which will result in this buffer being applied to them.

“We are in the process of rolling out pillar two, which really will deal with how banks go about assessing their own risks and how they, having assessed their own risks, how they go about making the adequate provisions to ensure they can absorb those risks should they crystallise. We hope to land pillar two by March of next year and then we’ll go on to pillar three, which will deal with disclosures and market discipline. So I would give us another two years to fully implement the Basel III framework, both in terms of all the different standards that are required,” Lewis explained when these new standards are set to be implemented.

Commercial Banks have been bolstering their capital bases over the last year ahead of the Basel III implementation. This has resulted in different DTIs capital adequacy rising even higher than in the last two years. National Commercial Bank Jamaica Limited, Jamaica’s largest commercial bank by assets, had a capital adequacy ratio of 14.5 per cent at the end of June. Sagicor Bank Jamaica Limited’s ratio was 13.0 per cent, JMMB Bank (Jamaica) Limited’s ratio was 12.65 per cent in June and the Bank of Nova Scotia Jamaica Limited’s (BNSJ) ratio was 13.63 per cent in April.

FirstCaribbean International Bank (Jamaica) Limited’s ratio was 15.94 per cent in October 2023 and has likely gone up even higher following a $759.82 million capital injection in the March quarter and a $3.86 billion injection in the June quarter by its parent CIBC Caribbean Bank Limited (formerly FirstCaribbean International Bank Limited). FCIB Jamaica also moved $1.13 billion into its retained earnings reserve and statutory reserve fund in the December 2023 quarter. JN Bank’s capital adequacy ratio was 14.3 per cent in September 2023.

For the first six months of 2024, total capital across the commercial banks rose 1.65 per cent to $300.20 billion. Total assets grew 2.19 per cent to $2.52 trillion, with loans and advances at $1.30 trillion. Total liabilities increased 2.26 per cent to $2.22 trillion with deposits at $1.76 trillion, of which $643.63 billion were in foreign currency. NCBJ controlled $186.86 billion in those foreign currency deposits, while BNSJ controlled $180.05 billion in foreign currency deposits.

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