09/01/2013

ow times change! Six years into the most pernicious global financial crisis since the Great Depression in the 1930’s, with the industrialized world still reeling from a credit crunch, a sovereign debt crisis and the real fear not of a double-dip but a triple dip recession, the global banking majors, largely acknowledged as the precipitators of the financial crisis, have been rewarded with a New Year’s bonus by the Basle Committee on Banking Supervision, the very organization that is supposed to regulate international banking. The recent announcement by the Group of Governors and Heads of Supervision (GGHS) of the world’s top banking regulators chaired by Sir Mervyn King – the Governor of the Bank of England – of the “Basel III: The Liquidity Coverage Ratio (LCR) and Liquidity Risk Monitoring Tools” report once again underlines the difficulty and complexity of regulating banks and reining in the excesses of bankers, and the seeming ineffectiveness of the whole Basle banking supervision process.

The LCR standard is one of the Basel Committee’s key reforms to develop a more resilient banking sector and its main objective is to promote the short-term resilience of the liquidity risk profile of banks. It does this, according to the above report, “by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario.”The components of HQLA are predictable because they are too watered-down; disappointing because they don’t go far enough; and in at least one respect, surprising, in that they include the Alternative Liquid Asset (ALA) framework which in turn include the “development of alternative treatments, and include a fourth option for Shariah-compliant (Islamic) banks.”

Shariah-compliant banks, according to the LCR document, face a religious prohibition on holding certain types of assets, such as interest-bearing debt securities. Even in jurisdictions that have a sufficient supply of HQLA, an insurmountable impediment to the ability of Shariah-compliant banks to meet the LCR requirement may still exist. In such cases, advises the Basle Committee, “national supervisors in jurisdictions in which Shariah-compliant banks operate have the discretion to define Shariah-compliant financial products (such as sukuk) as alternative HQLA applicable to such banks only, subject to such conditions or haircuts that the supervisors may require.”However, the Basle Committee warns that the intention of this treatment is not to allow Shariah-compliant banks to hold fewer HQLA. The minimum LCR standard, calculated based on alternative HQLA (post-haircut) recognized as HQLA for these banks, should not be lower than the minimum LCR standard applicable to other banks in the jurisdiction concerned. National supervisors applying such treatment for Shariah-compliant banks, however, should comply with supervisory monitoring, disclosure obligations and periodic self-assessment of eligibility for alternative treatment provisions as for all banks.

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Mushtak Parker - Saudi Gazette