Egyptian banks set to adopt Basel II

Mar 20, 2012

The Central Bank of Egypt announced on March 15th that it is about to introduce new reforms within the banking sector, including the adoption by the country's banks of the Basel II standards, Ecofin news agency reports.

The Central Bank of Egypt announced on March 15th that it is about to introduce new reforms within the banking sector, including the adoption by the country's banks of the Basel II standards, Ecofin news agency reports.

Banks will therefore have to raise their capital or reduce their balance sheet in order to own a level of capital stock proportional to their risk exposure.

They will also have to implement a reporting system to update the financial authorities on their capital stock level and their risk assessment methods.

The Basel II reforms urge banks to quit the Cooke ratio to adopt the McDonough ratio, finance expert Octave Jokung told Le Potentiel newspaper.

According to the Cooke ratio, the banks' stockholders' equity divided by the credit commitments have to be higher than eight percent.

The McDonough ratio uses the probability of default and the expected loss from default to assign varying weights to assets in the denominator.

It sets its benchmark at the same percentage value as the Cooke ratio, but the latter does not give different weights to borrowers of differing quality.

Basel II is therefore likely to stimulate the growth of banks by allowing them to refine their risk assessment system and evaluate more precisely their capital stocks needs.

Banks would have the financial resources needed to improve their risk management capacity, which should help to improve access to credit for companies.

According to a study from the French Treasury called Impact de Bale II sur l'offre de crédit aux PME , Economie & prévision 2/2007 published by Cairn.info, Basel II was conceived to encourage access to credit for small and medium enterprises (SMEs) that are considered more risky - with equivalent default probability and loss rate, debts from lenders on SMEs require less capital compared to larger companies.

However, the study adds that the required capital strongly evolves with the credit risk, which should push banks to raise prices depending on the company's risk.ADNFCR-2976-ID-801321385-ADNFCR