Thread: Iraqi/Dinar news until March 1st, 2007

19 February 2007 Basel II standards of banking supervision | Iraq Updates

The banks of the ten big industrial countries were supposed to end all preparations in 2007 for the implementation of the standards, mentioned above, having taken more than four years to study the issue and prepare it.

The implementation of these standards to ensure the safety of the banking operations and stabilize the financial status; thus avoiding the what happened with these banks, and some large Asian banks, from shocks in the eighties when a number of indebted companies and countries stopped paying their obligations towards them.

Basel II standards developed by the Committee included 25 criteria concentrated on the three main bases:
First, capital adequacy and the ability to withstand losses which the bank may be exposed to;
second, the formation of efficient internal scrutiny and control bodies that suit the volume of the banking business; their function is to monitor the implementation of instructions, policies and laws imposed on the banks to make them far from failures and suspicions in their business and reputation.
Finally, those criteria impose on banks putting policies that monitor and define the risks of the market being the environment in which banks operate and the place where they are exposed to the risks of changing interest rates, exchange prices and others. The Iraqi Central Bank has set a 12% rate capital adequacy to Iraqi banks, instead of 8%, which was the percentage set by the Basel II Committee because of the deterioration of security and economic conditions in Iraq.
However, there are other risks not covered by the Basel II Committee like: the management risks represented by administrative corruption, political risks represented by blocking and confiscating funds as well as economic sanctions imposed by international bodies, and there are the economic risks, such as inflation, recession and others.
The Iraqi Central Bank consider it most important to press upon local banks to abide by the standards mentioned because they ensure the banks’ safety and the continuation of their business. According to such, the Central Bank issued many publications and regulation guides urging banks to abide to: capital adequacy, legal reserves, the formation of responsible and efficient monitoring bodies, as well as setting rules for the classification of loans according to their types, their degree of risks and the amounts supposed to be allocated for each type.

The Central Bank has also held many illustrative seminars to introduce those criteria to the directors and staff of the banks.
In order to apply the standards mentioned, our banks need to prepare efficient human cadre specialized in accountancy, credit and control. The banks need to review their financial status, methods of performance, their capitals and the quality of their services because the investment law has been issued and major companies will enter Iraq along with their professional banks which will use very modern and advanced methods of information and technology; thus they might compete with our banks and sweep the market because of their large capitals. One of the motives that made the Basel II Committee specify the percentage of the capital adequacy is to pull the carpet from under the feet of Japanese banks which took up granting loans since the 1980s, particularly in Asia, because Japanese banks has less capital bases than European and American banks.

Basel II standards of banking supervision | Iraq Updates