Booz says banks in the GCC and Levant need to sober up to the possibility of capital shortfalls after Basel III kicks in.
GCC and Levant banks warned against complacency on capital requirements ahead of Basel III
GCC and Levant banks could face massive capital shortfalls because of tighter capital requirements if they do not manage their books more astutely, according to Booz & Company.
Despite a turnaround for banks in countries including the UAE in 2013 amid lower non-performing loans and provisions for bad debt, Booz warned that the banking industry in the GCC should not become complacent.
In a study of 64 GCC and Levant banks, the consultancy found that banks by 2017 could have a capital shortfall of US$27 billion in the worst-case scenario and $12bn in the best case. Such a deficit, which stood at about $11bn in 2012, would seriously hinder the banks’ growth prospects, Booz said.
The impending capital requirements are part of the Basel III financial reforms.
Basel III was born in the aftermath of the financial crisis and is aimed at ensuring, among other things, that banks have enough funding to cover short-term funding crises. The new capital and liquidity ratios for banks have not been finalised and for the time being, Booz said, the banks studied all met their capital requirements, and most exceeded the minimum capital requirement by 50 per cent or more.
A capital requirement is the amount of money a bank must have at hand, often expressed as a ratio of total assets, to meet any emergency funding needs.
“Based on 2012 performance, 15 of the 64 banks could fail to meet a capital requirement of 16 per cent and 29 of the banks could fail to meet a capital requirement of 18 per cent,” said Mazen Najjar, a partner with Booz. “To get an idea of how banks would perform in the future, we also ran two economic scenarios for 2017: one assuming growth in line with the projected expansion in GDP and another assuming decelerated growth. The results for the downside scenario were sobering.”
Booz noted that banks in the GCC and the Levant had received substantial capital and liquidity support from regulators since 2008 but said that these lenders must rely less on aid from governments and manage risks more efficiently ahead of Basel III implementation.
“The new requirements are much more stringent and they call for meticulous and recurrent capital planning that is integrated into the overall strategies of the banks,” the Booz study said. “Ultimately, more proactive management and strategic integration of capital and liquidity is necessary if GCC banks are to fulfil their growth ambition and compete on the global stage.”
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