Basel III: A silver lining for Middle East banks
Executive summary
Middle East banks have embarked on a laborious journey to comply with Basel III regulations. In jurisdictions where the regulations have been rolled out, banks have achieved this objective already, while in countries that are still finalizing their local versions, banks are trying to grapple with the implications of these regulations on their profitability, balance sheet, and operations. Although the regulations, in their local form, require a substantial amount of work — and in some cases, such as the new liquidity requirements, address issues that few Middle East banks face — they also represent an opportunity. By calling for higher capital requirements and more stringent definitions of capital, Basel III forces regional banks to take a hard look at their capital allocation and deploy their capital more strategically.
In this fundamental rethink of Middle East approaches to capital and risk, banks will need to instill a new mind-set regarding risk along four dimensions:
- Governance and oversight, requiring a strategic perspective on the bank’s risk profile and risk appetite
- Core risk processes and models, ensuring that decisions within and across lines of business align with the overall risk strategy
- Human capital, ensuring that the people responsible for making day-to-day decisions embrace a new mind-set about risk
- Core risk and management information systems, supporting the data-intensive Basel III reporting requirements from regulators
For forward-looking banks, the Basel III requirements can be much more than an administrative burden and a drag on growth and profitability. Rather, financial institutions should consider the new rules as a catalyst to upgrade their capabilities and as a call for thoughtful, balanced improvements of their risk-return profile. This will benefit the region not just during times of financial crisis or market dislocation, but for decades to come.