The State Bank of Pakistan (SBP) is one of the world’s most enthusiastic enforcers of the Basel II bank regulatory regime and the anti-money laundering information networking. The has led to the dominance of giant global conglomerates over domestic banking system.

The principal instrument used by SBP that has helped promote foreign banks is the never-ending increase in minimum capital requirement (MCR) for scheduled banks. The current MCR target is Rs6 billion and the banks are forced to increase their capital by Rs1 billion per year to meet this SBP requirement.

The domestic banks in all Basel II compliant developing countries, including Pakistan, are also discriminated against by the accelerated implementation of the Basel II. The SBP capital reserves for operational risk levied by the SBP under this roadmap is routinely higher for domestic banks than for international subsidiaries.

Since the inception of Dr Ishrat Hussain’s governorship, 29 merger and acquisition (M&A) deals have been struck. The SBP itself acknowledges that M&A wave is encouraging “capital inflows in the form of higher foreign participation” in domestic financial markets and has led to increased foreign dominance over national financial system. The moratorium on the opening of new commercial banks and the exclusion of Islamic banks from this moratorium also serves the same propose. Two major foreign banks have been the principal beneficiaries. Legislation has been amended to facilitate the merger of NBFIs with foreign dominated banks. Legal provisions for carry forward of tax losses of merged institutions have also benefited them..

Foreign banks have also been major beneficiaries of the liberalisation of the SBP’s bank branching policy. The new branch licensing policy has led to a concentration of the new (specially foreign) bank branches in rich elite enclaves. Foreign dominated Islamic banks have pursued elitist branching policies – there are literally no Islamic banks in non-elite districts.

On the other hand, small local banks (those with CAMELS – S) low ratings are not allowed to open any branches at all (under SBP/IBP Circular No.2 of 2004). Only major banks (NBP, MCB, ABL) are required to open new branches in deprived areas. Foreign banks are exempted since they have less than 100 branches in the country.

Extension of local banking operations are also constrained by the application of the Fit and Proper Test (FTP) under the SBP’s Code of Corporate Governance. Foreign banks’ boards and CEO’s usually pass FTP with flying colours for FTP is modelled on the norms and practices of US-driven financial markets.

The Credit Information Bureau access system (e-CIB) has been re-designed principally to enhance imperialist surveillance agency and financial market access to national data. This is specially evident in the discretion allowed to reporting financial institutions in identifying the borrower groups for reporting purposes. As Peru’s experience has shown, this is a key measure for ensuring one-way information traffic from developing countries to world financial system.

There are two major purposes of e-CIB upgrade. First, it facilitates shifting of the focus of monitoring of credit worthiness from large to small borrowers (specially agriculture, SMEs and consumer finance clients). More importantly the re-designed e-CIB is a key weapon America is using in its war against “money laundering” in Pakistan (as also in Jordan, Chile and until recently in Brazil).

By appointing External Assessment Institutions (EAI) SBP has effectively privatised the bank credit management system ---- it is the international credit rating agencies and not the State Bank which determine a bank’s capital requirement under Basel II ---- the lowest capital and mark-up requirement are stipulated for foreign banks, the highest for domestic medium-sized banks. Risk weights selected are strictly in accordance with foreign financing criteria. IT upgrading and training programmes for developing Basel II complaint capital and risk management systems being implemented by SBP are overwhelmingly dominated by international market consultants.

SBP has, during FY07, issued instructions to banks to introduce international financial market practices. Paradoxically, loan write-off policy is mainly exempt form concordance with international practices.

This regime has been designed and is being enforced by an American-led alliance of developed countries and their client global agencies. Developing countries have played virtually no part in designing this regime. This regime serves to accumulate capital in a way that tends to consolidates the domination of oligopolistic mega conglomerates over global financial markets. This ‘de-sovereigns’ all states except America and reduces their scope for policy intervention.

This post 9/11 regime was designed after the rejection during 1998-2000 of many schemes for building a new global financial infrastructure. The IMF was neither expanded nor abolished. Ann Krueger’s global bankruptcy proposals were defeated. The ‘Electronic Herd’-- fund managers, treasury professionals and insurance moguls---played a major role in ensuring this defeat. Financial market overlords have successfully blocked any increase in the authority of public multilateral institutions.

Instead the ‘Electronic Herd’ and their US-led sponsor states have pressed for more ‘transparency’ and standardisation. A system has been set up for close and frequent monitoring of changes in central bank reserves and public and private national debts enabling the imperialists to trace cross border and in-country money movements on a day to day basis. A rigorous application of disclosure procedures stipulated by International Accounting Standards (IAS), is insisted upon so that no major transaction remain hidden from hegemonistic eyes.

Most developing countries are unenthusiastic about Basel II standards as these measures also foster information system homogenisation and therefore exacerbate pro-cyclical financial volatility.

Holzer and Mills’ classic 2004 study shows that Basel II type standards encourage sophisticated foreign banks to adopt the so-called ‘advanced’ internal rating risk management models relying on current asset prices which are necessarily pro-cyclical thus raising capital requirements at times of economic downturns when banks are least able to meet these requirements. Basel II’s insistence on standardisation of risk management models thus further enhances pro-cyclical herd behaviour by banks.

Basel II standards discriminate against medium-sized and relatively small nationally owned banks and systematically promote preferential treatment of subsidiaries of giant banking corporations. Basel II standard implementation enhances the competitive advantage of foreign bank subsidiaries. Basel II requires local banks to carry more reserves and have higher capital adequacy ratios than foreign banks which adopt the ‘advanced’ risk management systems.

This raises the capital cost of local national banks relative to the capital cost of foreign bank subsidiaries. Foreign bank subsidiaries operating ‘advanced’ models are allowed to establish their credit risks and capital adequacy requirements themselves. SBP effectively sanctions self-supervision by foreign bank subsidiaries. Under Basel II mandate SBP imposes the highest risk weighting to the relatively smaller national banks ---- no question of “self -regulation” here.

A Basel Committee Report published in 2006 calculates that implementation of Basel II standards will allow foreign bank subsidiaries using the advanced model to reduce their capital adequacy requirements by 30 per cent. On the other hand local, national banks using the simpler ‘foundational approach’ will have to increase their capital adequacy requirements by 38 per cent.

The journeying along the SBP’s Basel II roadmap will raise capital costs and reduce lending by national banks; exacerbate pro-cyclical lending behaviour of banks, enhancing financial volatility and instability; and accelerate the trend towards acquisition of domestic banks by foreigners.

Most important, as the Pakistan banking system is subjugated to global finance, the development banking will be buried deep. The domestic banks will become agents of global financial markets and develop short-term, arms- length relationships with domestic manufacturers. They will be regulated by foreign agencies---Basel, BIS, IAS, IMF and the purpose of this regulation will be their complete subordination to global markets and to the hegemon America.

The Prudential Regulations designed by BIS and implemented through the Basel Agreements define prudence from the perspective of global financial markets---prudence is defined solely in terms of a bank’s assets, liabilities and reserves. This “prudence” does not take into account a nation’s needs, aspirations or long-term resources. Prudence dictates only the maximisation of a bank’s profits ------ and not the national interest, alleviation of poverty, promotion of asset distributor equity and safeguarding of national sovereignty.

The subjugating of monetary policy by the SBP to the international finance governance order has had two major disastrous consequences (a) loss of national control over the volume and composition of money supply and the determination of the level and structure of interest rate and, (b) the emergence of gross injustices in the distribution of bank credits.

Neither aggregate money supply nor interest rates are any longer under SBP’s control which is being transformed into a colonial Currency Board. The central operational mandate of such currency boards is to consolidate the control of the elitist global regime by increasing the concentration of financial wealth in the hands of its local clients. The ‘reforms’ of the financial system has led to a massive concentration of bank services and bank credit.

Edited extracts from the writer’s research paper