Central Bank mulls hiking minimum capital for banks once again

Yet again, Sri Lanka’s banking regulator has indicated it would increase the minimum capital levels of all licensed commercial banks (LCBs) with the objective of maintaining a sound financial system, which could withstand shocks, Mirror Business learns. To this end, the Central Bank is considering raising the minimum regulatory core capital level from the current Rs.10 billion to either Rs.15 billion or even up to Rs.20 billion, but the timelines are yet to be finalized.

In any case, the Central Bank is likely to issue directives to all LCBs indicating the transitional arrangements but some banks are wary of meeting this increase capital levels in quick time as it could be stressful for them. Eyebrows were however raised by some bankers over this speculation as it was only this January the banks were required to bring their minimum core capital level up to Rs.10.0 billion doubling from the earlier Rs.5.0 billion. Although it was seen as a tall order for a few small and mid-sized banks, for larger banks, meeting the requirement has so far been a natural progression. Some economists believe the move by the regulator was a covert, yet an effective way to bring the banking sector consolidation, which was put to rest under the new regime, back on the table. The banking and financial sector consolidation was first mooted under the governorship of Ajith Nivard Cabraal through forced mergers. But enhanced capital levels are a preferred mechanism worldwide to pursue sector banking consolidation

However, the idea is expected to be met with resistance by some small and mid-sized banks, which are struggling even to meet the earlier minimum capital requirements. Now with a new Central Bank Governor at the helm, it is expected he would too want a stable and stronger banking system, as he emphasized in his inauguration speech yesterday, that the banks are the lifeblood of a financial system. It was only yesterday, the analysts showed that the Chinese banking system would require anywhere between US $ 500 billion to US $ 3.0 trillion in fresh capital during the next two years to counter the mounting bad debt.

Chinese banks flooded the financial system with cheap credit for years to prop up economic growth. Meanwhile, the new BASEL III capital requirements will also come into effect soon, which will anyway increase both the core capital and total capital requirements maintained by a bank, among other things. According to the current BASEL II capital requirements, a bank must maintain at least 5 percent in Tier I (core) capital adequacy and 10 percent Tier II (total) capital adequacy levels but the BASELL III needs additional capital buffers.

Tier I capital in particular has to be raised by way of fresh equity but the real challenge would be whether the investors would want to invest in banks in return for unjustifiable returns when the other sectors look more appealing. With ever increasing minimum capital levels, part of which will stay idle and increased regulatory oversight, have fatigued the banks around the world but the 2007/8 global financial meltdown pushed the regulators to build up additional buffers in banks’ capital in order to face shocks.