A PROPOSED FRAMEWORK FOR INCLUDING ENVIRONMENTAL RISKS WITHIN THE DETERMINANTS OF CALCULATING CAPITAL ADEQUACY IN BANKS

Abstract

Basel III has directed banks to manage significant risks associated with their activity. Banks and Basel III have focused on managing both credit, market, operational and liquidity risks as most common risks in banking industry. Banks have therefore set up appropriate capital to counter these types Of risk, to be capital as first line of defense to absorb any losses resulting from exposure to banking risks. Despite diversity of environmental risks associated with banks' activity as well as increase in their effects, which amounted to direct losses only in 2011 about 400 billion dollars, for a number of not more than 1,600 accidents or environmental disaster only according to study prepared by World Bank (2013 Building resilience) . However, decisions of Basel III Committee did not take these risks into consideration when issuing their regulatory instructions to banks. The objective of research is to clarify nature of environmental risks associated with Bank's activity and associated environmental losses, while providing a proposed framework for including environmental risks within parameters of calculating capital adequacy standard in banks and in accordance with general framework of risk management in banks. The search for questions answered nature of environmental risks associated with activity of banks and to what extent banks are calculating capital to face environmental risks. Data collection was based on use of a questionnaire questionnaire that was directed to sample of study from managers and officials of risk departments in commercial banks operating in Arab Republic of Egypt. A total of 50 completed questionnaire forms were received. The data were analyzed through use of statistical packages for social studies (SPSS). The first hypothesis of research, which stated that there is no awareness among Egyptian commercial banks of environmental risks associated with Bank's activity, was not true. The second hypothesis states that the environmental risks associated with Bank's activity are not included in bank's capital adequacy criterion . The research has reached a number of results, most important of which are awareness of risk managers in Egyptian commercial banks of environmental risks associated with Bank's activity, as well as absence of existing environmental risk management systems in banks. The study also presented a set of recommendations, most important of which is documentation of policies and procedures for environmental risk management controls, formation of suitable capital to meet environmental risks related to bank's activity, so that it is first line of defense to bear any environmental losses.