CBK to introduce capital adequacy rules

The Central Bank of Kenya (CBK) has introduced new risk based supervision regulations for banks, to keep tabs on the banking industry’s capital adequacy.

The move will eliminate the need for banks to stick to a minimum requirement for capital but instead comfortably manage resources at hand based on individual banking needs.

The CBK has issued guideline not on the international capital adequacy assessment process (ICAAP) that will be used to monitor the financial health of banks.

Banks will be expected to present quarterly capital plans to the central bank for approval, indicating how internal capital levels are adequate and consistent with their strategies, business plans, risk profiles and operating environment s on a going concern basis.

“CBK recognizes that there is no single correct approach to conducting the ICAAP. As such, the focus of CBK is on providing high level guidance rather than prescriptive criteria on ICAAP methodologies or techniques that should be employed,” the CBK said in a statement.

Through the new regulations, banks will have the latitude to determine how much capital is required to run effectively.

CBK statutory requirements require banks to maintain a core capital of Sh1 billion while the Treasury has introduced changes to have banks raise their core capital to Sh5 billion by 2018 in an effort of strengthening the banking sector.

The ICAAP regulation however introduces a new method of measuring the soundness of banks not just based on the core capital. The CBK will introduce stress tests with banks expected to anticipate market volatility.

“An institution’s ICAAP should incorporate the results of forward-looking stress tests when evaluating the institution’s capital adequacy based on plausible adverse circumstances,” the regulator said.

The CBK has been tightening its supervision of the banking sector, keen on having banks meeting capital adequacy. This comes after three banks were placed under receivership in under a year.

In the case of Chase Bank, which was placed under in April, the bank faced serious liquidity challenges after panic withdrawals by customers after revelations high levels of insider lending. This meant the bank was unable to meet its financial obligations with the regulator unable to come to its rescue as the lender of last resort.

The central bank will routinely the extent to which each bank has kept its ICAAP and may call on banks to make certain actions on capital and risk management on the basis of its ICAAP.

Banks that fail to keep sufficient free cash to cover risks will have to seek capital injection from shareholders.