On average, 84 percent of licensees regulated by the Central Bank of The Bahamas (CBOB) experienced a decline in total capital adequacy ratio (CAR), and 95 percent of licensees would meet regulatory requirements in respect of minimum CAR under the Basel II/III framework.
In its second Quantitative Impact Study (QIS), CBOB found that capital levels for most licensees were above the minimum capital requirements, with the exception of a few cases where banks will have to increase their capital bases to hold adequate buffers of additional capital to comfortably avoid any breaches of the minimum capital requirements.
The study examined the financial returns of 44 licensees, representing 48 percent of all banks and bank and trust companies reporting capital to the regulator.
The QIS submissions for the period ended March 2016. The study revealed the overall impact of the Basel II/III minimum capital requirements.
For instance, the total CAR for seven domestic banks experienced a 1.62 decline under the Basel II/III capital accord in comparison to Basel I. In addition, 37 international banks had a 25 percent drop in CAR, leading to a total decrease of 20.98 percent for the group's average CAR.
"Under the Basel I framework, the group's average CAR stood at 54.72 percent; under Basel III, the group's average CAR stood at 33.74 percent.
"CAR decreased for most licensees within the group (37 out of 44 or 84 percent of licensees). However, there were several exceptions wherein capital adequacy ratios actually increased," said CBOB.
The regulator pointed out that under the Basel III framework, the group's average Tier 1 Capital ratio stood at 33.14 percent, representative of a 24.39 percentage point decline, whereas under the Basel I framework, the average Tier 1 Capital ratio stood at 57.53 percent.
"Overall, the results of the analysis indicate that the overwhelming majority (95 percent) of licensees within the entire group would meet the regulatory requirements in respect of minimum capital adequacy ratios as defined by Basel III," the regulator said.
The study points to an increase (on average) by 60.96 percent in total risk weighted assets (RWAs). "The main drivers of this increase related to changes in the credit risk equivalent assets and the operational risk equivalent assets. These factors led to a general increase in RWA and a decrease in CAR ratios across the group," said CBOB.
By classification, the increase was attributed to an 81.62 percent impact from a credit risk charge, 14 percent operational risk charge and a 4.38 percent market risk charge. The Basel III framework requires Common Equity Tier 1 (CET1) ratio to be raised to 4.5 percent. This ratio is the highest form of "loss absorbing capital".
The group's average CET1 stood at 32.96 percent. "On an individual basis, we noted all banks in the group had CET1 ratios ranging from 7.08 percent to 149.74 percent under the new Basel III requirements," said the bank. The regulator warned that continued monitoring of CET1 levels is needed under the Basel III capital accord.
The bank said that beginning 2018, financial institutions would be required to hold a Capital Conversion Buffer (CCB). "The CCB is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred," the regulator noted.
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