KARACHI, April 1: The State Bank has asked banks and development finance institutions (DFIs) to prepare for smooth transition from present capital adequacy framework towards more risk sensitive new capital adequacy framework — the Basel II. It has asked them to appoint coordinators for this purpose by May 31, 2005. asel Committee on Banking Supervision of the Bank for International Settlement —- an international organization based in Basel, Switzerland — finalized new capital adequacy framework commonly known as Basel II on June 26 last year. It provides a framework for capital allocation that is more risk sensitive than Basel I.

Basel II offers a series of approaches -— from simple to complex ones — for capital allocation against credit risk and operation risk. Besides, it requires banks to establish a strong comprehensive risk management in accordance with the complexity and diversification of their business.

In this regard Basel II prescribes a strong and vigilant role for central banks and other regulatory agencies. Further, the accord envisages a detailed disclosure requirement depending upon the specific approach adopted by the institution for capital allocation to enhance transparency and market discipline. The SBP has decided to adopt this new capital adequacy regime -— central banks of other countries are also going to adopt it —- and now it will be a benchmark for assessing the capital adequacy of banks.

The central bank has issued a circular to all banks and DFIs requiring them to designate one senior official each who will supervise activities relating to Basel II within the bank and will serve as a point of contact between SBP and that particular bank.

This responsibility may be assigned to head of risk management or chief credit officer or chief financial officer. “Banks/ DFIs are required to establish an adequate setup and report to SBP the name and other particulars of the coordinator of Basel II implementation as soon as possible — but not later than May 31, 2005.”