Latest Developments of Basel III in Sri Lanka

Abstract

With the economic downturn resulting from downgrading of ratings of sub-prime backed securities and collapse of some banking organizations in the world, the Bank of International Settlements (BIS) started to strengthen the capital requirements for banks to prevent banks from collapsing by taking excessive risks. Accordingly, BIS revised the guidelines of Basel I and II as Basel III introducing enhanced regulatory requirements to improve resilience of banks. Accordingly, through Basel III, the quantity and quality of capital was raised, consistency and transparency of capital and the risk coverage of capital framework was improved. As supplementary measures to the risk framework, the leverage ratio was introduced, the procyclicality was reduced and countercyclical buffers were promoted and Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were introduced as short term and long term liquidity measures, respectively. With the above requirements, Central Bank of Sri Lanka (CBSL) announced the road map for implementation of Basel III in Sri Lanka in 2014. Accordingly, LCR implemented with effect from 1 April 2015, minimum capital requirements of banks were increased from end 2015 gradually to achieve the target level, implemented Leverage Ratio with effect from 1 January 2019, NSFR and capital requirements with effect from 1 January 2019 including capital conservation buffers to fully implementation of Basel III in Sri Lankan banking sector.