Thursday, July 27, 2017

Banks must limit financial exposure to 20% of core capital, says CBM

Domestic banks will not be allowedto take on financial exposure to a single individual or entity of more than 20% of its core capital, the Central Bank of Myanmar (CBM) said July 11.

New regulations by the Central Bank of Myanmar will limit local banks’ financial exposure. Thiri Lu / The Myanmar TimesNew regulations by the Central Bank of Myanmar will limit local banks’ financial exposure. Thiri Lu / The Myanmar Times

Effective immediately, the new regulation is aimed at aligning Myanmar’s banking standards with international Basel II standards, a CBM director told The Myanmar Times. Currently, domestic banks are still operating on Basel I standards.

Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations.

The main difference between Basel II and Basel I is that Basel II incorporates the credit risk of assets held by financial institutions when determining the required capital reserves.

The new regulation will reduce domestic banks’ risk and will be good for the sector in the long run, former CBM Vice Governor and Senior Advisor from Kanbawza Bank U Than Lwin said.

“Without such controls, if there are large amounts of loans, the risk is high for our banks. This is a good regulation as it is in line with international standards,” he added.

“However, moving from Basel I to Basel II is easier said than done. There will be a lot to reform like data collection and auditing procedures,” he said.

The new regulation also stipulates that while secured transactions between domestic banks are unlimited, unsecured transactions are limited to 100% of the bank’s core capital. In addition, the aggregate of all large exposures of a bank are not to exceed 8 times its core capital.

Meanwhile, a second regulation stipulating that banks must maintain a minimum liquidity ratio of 20% at all times also became effective on July 7. The liquidity ratio sets the minimum reserves each bank must hold in order to cover its short-term debt obligations.

“Every bank must calculate their daily liquidity ratio position and, report its weekly average at the start of the succeeding week,” the CBM said on July 11.

Translation by Zaw Nyunt