Uganda leading as central banks up regulatory stakes

Bank of Uganda (BoU) building in Kampala. BoU has just proposed to increase commercial banks’ Tier I capital ratio from the current eight per cent to 10 per cent. FILE PHOTO

What you need to know:

  • To ring-fence the financial system against such amplifications, BCBS created a countercyclical buffer-which is some kind of rainy day fund for extreme cycles.
  • There is need for lenders to have adequate capital rations to survive shocks, George Bodo writes.

In response to challenging macro-environments, banking sector regulators across sub-Saharan Africa seem to be upping the regulatory antes.
Last week, Ghana’s Central Bank, the Bank of Ghana, hiked its minimum core capital regime to an equivalent of $91 million, from the previous minimum of $27 million with a compliance deadline of December 2018.

Bank of Uganda has just proposed to increase commercial banks’ Tier I capital ratio from the current eight per cent to 10 per cent.
Additionally, it wants to introduce two capital buffers: a capital conservation buffer of two-and-a-half per cent (of commercial bank’s risk assets) and a countercyclical capital buffer of 2.5 per cent to be triggered in circumstances of excessive credit growth, to apply to all banks.

It doesn’t stop there. The apex bank also plans to introduce an additional buffer ranging between 1-3 per cent for banks it will have classified as domestically important only.
Quite unprecedented too. I shall unpack everything. In the aftermath of the global financial crisis of 2008, one of the biggest puzzles for regulators was the inability of financial institutions to withstand shocks and the ease with which financial institutions collapsed-despite prior display of sufficient balance sheet strength.

Consequently, a core learning point drawn by regulators was the need to compel supervised financial institutions to build sufficient balance sheet buffers.
In response, global regulators converged, like they periodically did, under their auspice of Basel Committee on Banking Supervision (or BCBS), to formulate a response.
The name Basel is derived from the fact the committee (warehoused by the Bank for International Settlements) is domiciled in the Swiss city of Basel.

Their response came in the form of a document they titled “Basel III: A global regulatory framework for more resilient banks and banking systems”; and which is now famously referred to as simply Basel III.
The document outlines, among many other things, two-pronged guidelines on how banking sector regulators can implement buffers. First, they introduced capital conservation buffers. This is some kind of rainy day fund for future unforeseen losses.

They are required to populate this rainy day fund in good times-when business is booming and everybody is making money. Even at individual level, your financial advisor often insists you set some money aside as savings for future emergencies.
Essentially, in periods of extreme losses, capital conservation buffers is the first line of defence. Kenya implemented a two-and-a-half per cent (of a bank’s risk assets) capital buffer effective January 2015. Secondly, there’s the countercyclical buffer.

The banking business has cycles. In fact, it is often said that banks tend to book poor quality assets during periods of credit boom-and vice versa is true.
This procyclicality, in times of distress-such as the 2008 GFC, easily amplifies financial shocks throughout a financial system.
To ring-fence the financial system against such amplifications, BCBS created a countercyclical buffer-which is some kind of rainy day fund for extreme cycles.

It was also capped it at a two-and-a-half per cent of a bank’s risk assets. In separate guideline, BCBS also asked regulators too single out banks it considered too-big-to-fail (or the DSIBs) and prescribe additional ring-fencing mechanisms for such institutions.
Effectively, Uganda has just kicked off adoption of Basel III guidelines.

Progress Chisenga is the marketing director, Vodafone Uganda.