Nasser Saidi, chief economist and head of external relations, DIFC (Dubai International Financial Center) Authority, made the remarks at an economics workshop on regulatory reform and the banking sector.
The event brought together financiers and business leaders to network, share knowledge and discuss the latest trends in risk management, regulatory capital, disclosure and governance.
It focused on the impact of Basel III as a new global regulatory standard for global financial institutions, with the emphasis on its implementation and subsequent effects in the Middle East and North Africa (MENA) region.
The event was organized by DIFC, the financial and business gateway between the regional emerging markets and the world.
“As the centerpiece for capital regulation to avoid crises, the Basel approach has failed in its first and second formulations,” said Nasser.
“Despite regulations and Basel II, which were in place at the time of the recent financial crisis, banks were overleveraging and their internal risk models significantly underestimated capital needs,” he said.
The economist also said the new Basel III regulation aspires to make the banking system safer by redressing many of the flaws that became visible over the past couple of years.
“Improving the quality and depth of capital and renewing the focus on liquidity management is intended to spur banks to improve their underlying risk-management capabilities,” he added.
“Though GCC countries were less affected by the crisis, economic and financial turmoil unveiled the vulnerabilities derived from rapid credit growth and inflows of short-term capital,” said Nasser.
“We saw critical disruption in the real estate and construction sectors, and the GCC’s unhealthy dependence on foreign speculative capital became clear,” he added.
He said Basel III has intensified the urgency to develop regional capital markets as the financing of future infrastructure projects is limited with little alternative forms of non-bank financing.
The main challenges facing GCC banks will be to meet liquidity requirements in the absence of money and debt markets and particularly the absence of government securities markets, Nasser pointed out. He identified six areas, which the GCC nations need to develop in order to deal with the economic weaknesses of their respective economies:
• Macro-prudential measures to address systemic risks, economic cyclicality derived from oil prices, volatility produced by short-term capital inflows
• Enhanced regulatory and supervisory tools
• Development of local currency money and debt domestic markets
• Collection & dissemination of financial & economic statistics & early warning system
• Liberalization of banking & financial services in the GCC by establishing a “GCC banking passport“
* Establishing a GCC college of bank supervisors
The Basel Committee on Banking Supervision recently updated their guidelines for banking regulations in response to the global financial crisis.
Basel III proposes new capital, leverage and liquidity standards to strengthen the regulation, supervision and risk management of the banking sector. The updated regulations require banks to hold more and higher quality capital than under current rules.
The workshop addressed a series of topics, including “Regulations, Standards and Financial Crises: A New Paradigm?,” “Basel III and its Impact on the GCC banking sector,” “New Philosophy and Architecture of Risk Management,” “Macro Consequences of Regulatory Reforms,” “Corporate Governance” and “Expected Impact of Basel III on the MENA Banking Industry.”
The speakers included: Bryan Stirewalt, managing director, DFSA; Tim Plews, partner, Clifford Chance LLP; Angus MacLennan, chairman of the advisory board, IRSQ; Charles Stewart, senior sirector, Moody’s Analytics; Marios Maratheftis, head of research — Western Hemisphere, Standard Chartered Bank; Timothy Fox, head of research and chief economist, Emirates NBD; Torsten Buening, head of group economic capital & risk strategy, Emirates NBD; Helene Narcy, chief financial officer for MENA region, UBS; and Nick Nadal, director, Hawkamah Institute for Corporate Governance.
