CBSL touts implementation of Basel II

Over the course of the past few years, the Central Bank of Sri Lanka (CBSL) has been moving forward on getting banks in Sri Lanka to implement the Basel II, the second of the Basel Accords which are recommendations on banking laws and regulations which were published in 2004.

Basel II sets forth international standards which can be used by banking regulators in creating regulations on the capital banks need to put aside as safeguards against financial and operations risks they face. Banks in Sri Lanka are required to implement Basel II recommendations by this year.

At a recent seminar on risk and compliance challenges in Sri Lanka organized by Keells Business Systems Ltd (KBSL), Oracle and i-flex solutions, Deputy Governor of the CBSL, Dr. Ranee Jayamaha said 2008 has been a continuation of global challenges.
These include the impact of the sub prime turmoil in the United States has affected Europe and other parts of the world, the Northern Rock crisis in the United Kingdom and large fraud in global markets, in particular Societe Generale, the French bank which recently disclosed a fraud of 4.5 billion euros. All these events served in exposing the vulnerability of the regulatory framework.

Jayamaha said the credibility of the bank suffered another blow this week when a report was released, stating that certain mechanisms of internal control of Societe Generale did not function and that functions were not always followed.

Jayamaha said the Sri Lankan market has not been affected and is not as sophisticated as some of the overseas markets but still needs governance and regulation. She added that Sri Lanka is tempted to provide low quality credit and has made bad credit decision, some of the same reasons which has led to the sub prime crisis and urged Sri Lanka to learn from these lessons to avoid them in the future. To this effect, she said the CBSL has moved from compliance based supervision to risk based supervision
Jayamaha said Sri Lanka should adopt the components of GRC or governance, risk and compliance. A greater level of governance should be present in more sophisticated financial institutions.

Risk management is identifying, assessing and the continued monitoring of risks. Jayamaha described compliance as the observance and application of standards of market conduct.

Jayamaha said it is prudent on the part of financial institutions to pay attention to having liquidity at all times which requires a proactive and systematic process aimed at understanding, managing and communicating risks as well as making strategic decisions which contribute to the overall objective of the bank.

Jayamaha also pointed out that there was a great deal of reluctance by Sri Lankan banks to improve their IT infrastructure, citing the high cost of investment and the time it would take to reap benefits from the changes. She said this mindset has to change if banks and financial institutions want to avoid operational losses from fraud amongst other things.

Jayamaha said that as part of the Roadmap for implementing Basel II, GRC should be implemented as a package and urged the board of directors of financial institutions, the management and its employees to show commitment at all levels.

Furthermore, all stakeholders should be convinced that the three GRC elements point towards the same goal. An integrated GRC package should then be designed relating to the business model of the institution.
She also said leveraging on technology on the roadmap is crucial since technology is a critical factor in the efficiency of the GRC elements and would provide greater organization for financial institutions.

Principal architect of risk and compliance solutions and head of business development at Reveleus and Mantas for Japan and the Asia Pacific region, Saloni P. Ramakrishna also addressed the seminar. Ramakrishna said there is no debate about whether to implement Basel II but there is a debate on how to implement it. She said some of the challenges are the high cost, the lack of consistent and standardized data and the lack of integrated institution wide IT systems. She also pointed out that Sri Lanka has experienced rapid credit growth, doubling from 2001 to 2006, which requires greater vigilance.
(NG)