BASL III - Some of the Basics

Please Note. - This is not for those who are highly learned of the subject matter. This is a very basic idea of the subject, and I'm no expert of it. What I am jotting out here are what I gathered from the Web, since I'm no expert at all on this subject. As I got more information and a bit of increased understanding, I thought of placing them here for who ever would want to know about it and perhaps understand more. 

BASEL is actually a City in Switzerland. The Institution called Bank for International Settlements (BIS) is located in this city. BIS hosts and supports a number of International Institutions engaged in Standard Setting and Financial Stability. One of which is BCBS.

BCBS is the acronym for Basel Committee on Banking Supervision. In other wards the committee in Basel on Banking Supervision is BCBS. BCBS had been established in 1974, by the Central Bank Governors of Group of Ten Countries. Since 2009 all of the G-20 Major Economies are represented as well as Hong Kong and Singapore.

This Committee have introduced 2 accords before the BASL III. Namely BASL I in 1988 and BASL II in 2004.

BASL III was introduced after the Subprime Crisis in 2007, and the Global Financial Crisis in 2008 - 2009. Primary objective of it was to reduce the ability of Banks to damage the Economy.

Basel III regulations contain several important changes for banks capital structures. First of all the minimum amount of equity as a percentage of assets will be increased.

A brief yet comprehensive Sri Lankan explanation had been carried in the Echelon Magazine sometime ago. Which can be read here: https://echelon.lk/home/what-you-need-to-know-about-basel-iii-and-sri-lankan-banks/ .

As far as the Banking Industry is concerned, we will have to know from now onwards that in order to minimise risk and improve the quality and stability the Banks will need to set aside capital which otherwise would have been used for various activities in the Economy. This quantum of Capital to be disbursed in their normal course of business will have to be kept under check within these % requirements always. As this is something that the Banks need to accommodate and live with from now to the future it will need time for all players to understand the Status quo and invent strategies accordingly.

As a result there will be a state of confusion and disarray in the short term. But regulations to increase  risk handling has been happening in the Banking Industry World wide for many decades, as such this regulatory shift also will get absorbed into the day to day activities of the Banks. 

Increasing the Standards to reduce risk will certainly increase the stability of the Banks, which will increase the confidence level of the Investors. As far as Local Banks are concerned, They were adequately capitalised with over 10% Capital Adequacy Ratios. The new requirements will increase it higher, which will make them even more safer. 

Regulations of this type will reduce the risk of Banks, but it will be at the cost of reducing the growth of Economic Expansion. This is because the Banks Lending and the provision of Credit are among the primary drivers of an Economy. Therefore regulations to reduce the provision of credit can hinder the Economic growth to a certain level. But due to the extent of damage that would cause have made many Institutions and Individuals to accept a slower Economic Growth for a greater stability and a decrease of events such as what happened in 2008-2009. 

As an Economy that had to face many damages due to the 30 year Ethnic War, having to tighten the regulations due to crises that took place elsewhere in the World who did not go through what Sri Lanka went through is an important factor to keep in mind, especially when the Country is resurrecting in terms of Infrastructure, Re-Settlement in the War Torn regions, and introduction of various Economic activities in a Post War Sri Lanka. 

In addition to the Basel III requirements, our Banks are hit by various Taxes and SLRFS 9 provisioning. These have significantly crippled the ability of the growth of shareholder funds. 
However the negative effects of these developments have and will bring the Market Prices of Banks down further, which in turn will determine the future of the PE, ROE and PBV. Which indicators will help the Investors to decide whether to get in or stay out.