Supervisor of Banks Rony Hizkiyahu has issued guidelines requiring the banks to publish their 2008 capital adequacy ratios in accordance with Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision by April 15. The banks must comply with Basel II by the end of 2009, and file parallel reports for both current Israeli and Basel II guidelines during the year.
The Basel II guidelines will likely reduce the capital banks use to calculate their capital adequacy ratios. The new standards will penalize banks with poor credit portfolios and operating risk will see lower capital adequacy ratios, while giving an advantage to retail banks or banks with large mortgage business, such as Mizrahi Tefahot Bank (TASE:MZTF).
In July 2008, the Bank of Israel published its Quantitative Impact Study 5 (QIS 5), which examined the effect on capital adequacy ratios had the banks adopted Basel II in 2006. The study found a 0.61% drop in the banks' average capital adequacy ratio. This is a substantial amount, which would have forced the banks to increase their capital by NIS 5 billion to reach their actual capital adequacy ratios.
The Basel II guidelines stipulate that banks calculate all their own risk elements. They must rate each borrower, determine each one's risk level, and make a different provision rate for each loan according to its risk level. The guidelines change the capital provision for the credit risks in the banking system by better matching of the provision to the specific risk.
Published by Globes [online], Israel business news - www.globes-online.com - on January 4, 2009
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