BASEL III AND ABOLITION OF UNIVERSAL BANKING MODEL – IMPLICATION FOR NIGERIAN BANKS Introduction:
In the aftermath of the economic recession which pulled down many global banks and exposed multiple weaknesses in regulation and banking structures, the Basel Committee on Banking Supervision agreed to new rules on the minimum level (capital ratio) and composite structure of Banks capital on the 12th of September, 2010. Broadly speaking, the new rules which are widely referred to as Basel III (and are mainly Basel II plus new regulations based on lessons from the market crisis), still stipulate a minimum Total Capital Ratio of 8%. However, in addition to increasing the portion of the 8% requirement that is Core Tier 1 Capital (from 2% to 4.5%), it requires Banks to reserve more common equity under what it calls Capital Conservation Buffer (2.5%), which in many respects is a modification of the IMF proposed ‘Bank Tax’. Thus, with this new buffer, Banks’ Total Capital Ratios would rise to a minimum 10.50%. However, these new capital requirements will be progressively implemented over an 8-year span, with full implementation taking effect by January 1, 2019 (BIS, 2010). Furthermore, following the final assent to the Basel Committee’s proposals at the Seoul G-20 Leaders Summit in November 2010, member countries of the Bank for International Settlement (BIS) are currently domesticating the proposal and making further amendment in line with the peculiarities of their country’s financial system.
In apparent response to the developments in global financial community especially the new Basel III, the Central Bank of Nigeria in a Circular No. BSD/DIR/GEN/UBM/03/025 dated September 7, 2010 gave hint to abolishing the operation of the 10-year old universal banking concept. Some of the reasons proffered by the regulatory body for the abolition include the enhancement of the quality of banks, financial system stability and evolution of a healthy financial sector, ensuring the protection of depositor funds by ring fencing “banking” from non-banking business; redefining the licensing model of banks and minimum requirements to guide bank operations going forward; effective regulation of the business of banks without hindering their growth aspirations; and facilitating more effective regulator intervention in public interest entities. In the new licensing model, banking will be calibrated in a capital scale and fitted into a four-tier operating structure of international, national, regional and specialized institution. As part of the new structure, the Central bank also introduced a holding company model that permits a non-operating holding company to own bank and non-banks subsidiaries. The eventual ending of universal banking regime and the implementation of the new licensing model have far reaching implications for the banking industry. The most critical aspect of consideration according to Uzor (2010) is the fact that universal banking was a market induced evolution rather than a regulatory invention. It was the culmination of a quest to end competitive disadvantages for some class of banks and create level playing field for all. The new licensing model will tamper with the concept of level playing field in market place competition and return the industry to institutional distinctions.
The aim of this seminar paper is to review the Basel III framework (the BIS new rules on capital) and its likely impact on Nigerian banks. The paper will also review the new Banking structure in Nigeria, highlighting potential challenges and implications for banks in the country. To this end, the paper will be structured into five sections. Following this introduction, section 2 will review the Basel III capital framework.
Section 2: The New Basel III Framework
The Basel Committee is a 35-year old sub-set of the Bank for International Settlements (BIS), which has as its members, the Central Bank Governors and Heads of Supervision of 27...
Please join StudyMode to read the full document