HomeOpinionErich Bloch Column: The pursuit of bank stability in Zim

Erich Bloch Column: The pursuit of bank stability in Zim

Over the past 10 years there have been recurrent instances of Zimbabwean banks collapsing, or being so weakened that the Reserve Bank of Zimbabwe (RBZ) has had to intervene, pursuant to its supervisory role over banks and other financial institutions. Its interventions have ranged from the forced closure of some banks to the placement of others under curatorship. The RBZ has had to prescribe minimum capital requirements for banks as a pre-condition to their being licensed, and to the continuance of licences and, therefore, of the banks’ operations.

However, despite such controls and measures, the stability of various banks and the security of depositors’ funds in those banks have continued to be uncertain. Such banks have been unable to fulfill their obligations to their depositors, and grossly unable to effect timeous interbank transfers on behalf of clients, or to fund client withdrawals of funds.

 

This has necessitated greater supervision and controls by the RBZ, but up to now without restoration of public confidence in the banking sector, and ongoing reluctance of non-resident institutions to avail lines of credit to Zimbabwean banks.

Internationally, as bank collapses occurred periodically with concomitant weakening of economies, First World countries have sought measures to assure bank stability and, therefore, enhanced confidence of populations in general, and business sectors in particular, being a prerequisite of stable and sound economies.  The first endeavour to achieve this was the adoption of a policy framework via the Bank for International Settlements, through that Bank’s Committee on Banking Supervision in Basel, Switzerland. 

 

That policy was the “International Convergence of Capital Measurement and Capital Standards”, which became known as Basel I, and became effective in July 1988. 

It was progressively adopted by bank supervisory authorities in more than 150 jurisdictions in the world, including Zimbabwe, and was expected to provide stability to the international banking system by its definition of consistent safety and soundness standards, and by promoting better coordination amongst the regulators and financial supervisors in the participating countries.

However regrettably, it became apparent that the Convention’s methods of calculating bank requirements did not suffice to achieve effective and sensitive measurement of risk exposures.  In particular, the Basel I provisions did not sufficiently determine the levels of regulatory capital required in a progressively increasing complex and dynamic banking system in developed countries functioning internationally. Some modifications were therefore effected to the Convention in 1996, prescribing that banks had to allocate capital for both credit risk and market risk exposures.

Even those modifications did not suffice to maximize the wellbeing and security of banks nationally and internationally, hence in June 2004 a new international banking accord was concluded, known as the Basel II Convention.  That accord was agreed between the Bank of International Settlements, the heads of the central banks of the over 150 participating countries (again including Zimbabwe), and the heads of the supervisory authorities of the G10, being effectively the world’s largest economies. 

 

To a major extent the many provisions of Basel II were centred upon three key elements, being:

Regulation of minimum capital requirements for key banking risks;

Supervisory review processes and assessments, by banks, of their overall capital needs  relative to their risk profiles; and

Comprehensive market disciplines, founded upon extensive disclosures; those elements being driven by an overarching goal to advance the practice of comprehensive and effective risk management.

It was envisaged that Basel II would convey seven key benefits, being:

Creation of an enhanced linkage between minimum regulatory capital and the risk profiles of each bank;

Promotion of banking sector stability;

Bringing about an increasingly integrated global financial system;

Strengthening of the linkage between regulatory capital and risk management;

Incentivisation of banks to improve risk measurement and management;

Provision of a consistent framework for improving supervisory assessments of capital adequacy and risk management; and

Ensuring that banks maintain levels of capital aligned to their risk exposure, concurrently with adequate control of risks.

Despite these measures, major bank failures have been witnessed during the last four years in Scotland, the USA, Greece, Spain, Zimbabwe and other countries, whilst others are still in perilous circumstances thus creating widespread lack of confidence in the security of depositors’ funds.

In Zimbabwe, depositor security concerns have been a major contributor to the pronounced illiquidity in the money market in recent times.  This has been despite a progressively intensified monitoring and control of the banking sector by the RBZ, including intensified bank audit requirements, prescription that banks must apply the Basel II standardised approach to allocation of capital for market and operational risks, and issuance of numerous guidelines.

The global financial crisis of the last few years has highlighted weaknesses in some elements of Basel II, which motivated the Basel Committee on Banking Supervision to enhance the Basel II provisions.

 

That enhancement has been dubbed Basel III, and RBZ and the Ministry of Finance are now energetically prescribing banks’ compliance therewith, concurrently with much concentration on restoring viability and security to presently endangered banks.

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