Abstract
Orientation: Basel III makes provision for banks to assess their internal capital adequacy by means of risk-based approaches, stress tests and a leverage ratio. However, the Basel regulations do not prescribe to banks or to bank supervisors which method should be used or how it should be used. Research purpose: The research problem was whether a framework could be formulated for the implementation of an internal capital adequacy assessment process in accordance with the Basel III accord. Motivation for the study: East and west African banks and bank supervisors (BS) aspire to become fully compliant with Basel regulations and requested research regarding an internal capital adequacy assessment process (ICAAP) framework for the implementation of Basel III. Research approach/design and method: A participatory action research (PAR) approach was used because PAR contributes to both knowledge creation and improving professional practice. The PAR comprised a survey and interest groups attended by bank supervisors and senior officers of banks. Main findings: As a result, an actionable framework for the performance of internal capital adequacy assessment is proposed. Practical/managerial implications: Capital adequacy, applied appropriately, safeguards a bank’s own economic sustainability and the stability of the financial sector in general. Contribution/value-add: The proposed capital adequacy framework assists bank supervisors and risk managers to apply a more consistent approach for the implementation of the capital adequacy requirements of Basel III.
Highlights
Banks in Africa need to be concerned about their capital adequacy if they wish to perform their intermediation role with reduced risk of future crises (Blundell-Wignall & Atkinson 2010:24).According to the Basel Committee on Banking Supervision (BCBS) of the Bank for International Settlements (BIS) (2010), the financial crisis of 2007–2009 exposed a number of weaknesses in the financial system, including shortcomings in banking regulation and supervision.the BCBS introduced Basel III in 2010 to improve the resilience of the banking sector by constraining excess leverage and requiring capital in addition to the economic capital of banks, known as Tiers 1 and 2 capital
The problem of this research was whether a framework for the implementation of internal capital adequacy assessment process (ICAAP) by banks in east and west African countries could be designed
The literature indicated that the implementation of Basel III and ICAAP in particular, requires leadership, specialised knowledge and skills from bank supervisors (BS) and bank staff members alike, as well as appropriate information and communication technology
Summary
The BCBS introduced Basel III in 2010 (and revised it in 2011) to improve the resilience of the banking sector by constraining excess leverage and requiring capital in addition to the economic capital of banks, known as Tiers 1 and 2 capital. Such additional capital would act as protection against model risk and measurement errors, as well as the ability to cope with procyclicality and the interconnectedness of financial institutions (BIS 2010:2). Tier 1 includes share premiums as a result of issuing shares; retained earnings; accumulated other comprehensive income and undisclosed reserves; ordinary shares issued by consolidated subsidiaries of the bank and held by third parties for capital adequacy purposes; and regulatory adjustments applied in the calculation of Tier 1 capital
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