Tougher regulations should protect Egyptian banks from turmoil (Photo: Reuters)
Egyptian banks will have to hold a higher level of capital to protect their riskier assets after a change in banking regulations due to be finalised by the end of this month.
The Central Bank of Egypt (CBE) and the European Central Bank (ECB) announced on Thursday that a joint banking supervision programme paving the way for Basel II capital adequacy will be completed by 31 March.
The programme, initiated in 2009, was financed by the European Union. The CBE was assisted by the ECB and the central banks of Bulgaria, Czech Republic, Germany, Greece, France, Italy and Romania in its preparation of new regulations, guidelines and reporting systems.
Basel II comprises three 'pillars'. The first deals with minimum capital requirements and specifies that banks hold a certain amount of capital proportional to their risks.
Internal risk management is the basis of the second pillar, ensuring that banks hedge against non-quantifiables such as operational risk, rather than solely on loans as was previously the case.
The third pillar deals with market discipline and obliges banks to meet tougher disclosure rules.
Basel II's stipulation that banks hold higher capital against riskier assets has discouraged them from lending to riskier enterprises. This regulation, however, provided little protection from the 2008 financuial crisis, as banks did not directly hold risky assets but high-rated ones which were backed by subprime instruments.
Egypt is a step behind in adopting the regulations. Following the global crisis, Basel II rules were superseded by Basel III ones in the hope they would give better protection against financial hazards.