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Ethique et normes de la finance > Archives des Séminaires de recherche > Séminaires de recherche 2012 > Mars - The impact of Basel III on Islamic banks: A theoretical study and comparison with conventional banks by Dr Hadel ARZI

Mars - The impact of Basel III on Islamic banks: A theoretical study and comparison with conventional banks by Dr Hadel ARZI

Since the last financial crisis, the Basel Committee on Banking Supervision, (BCBS), an international organization which main objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide, has issued some reforms more know as Basel III new framework.

The major parts of the propositions are included in the document Basel III: A global regulatory framework for more resilient banks and banking systems published in version June 2011.

This document contains all the needed reforms in order to prevent the financial system from future crisis. This framework is only propositions, but it really became a global standard as both the European Union (CRD41) and USA2 have decided to pass the BCBS regulation proposal into their legal frameworks.

Basel III will have a major impact on the business plans and the strategy of conventional financial institutions. It will introduce a lot of modifications: new own funds and risk computations, new ratios, modification of the Tier 1 and Tier 2 category, new solvency ratios, introduction of new concepts (Asset Value correlations, Credit Valuation adjustment, PD downturn, Stressed VaR), new buffers (Capital Conservation and countercyclical Buffers), and new limits in terms of leverage and liquidity ratios.

If we consider that Basel III framework was thought only for conventional banks, and as Basel III will be an international standard with regard to the precedent Basel Committee proposals (Basel 1 and Basel II), we can ask whether this new regulation is compliant with the Islamic banks as the financial structure of conventional and Islamic banks are quite different.

Moreover, we will see if, from a theoretical point of view, if the Basel III impact is more or less important in Islamic banks than in conventional one by analyzing each new reform and its potential impact in the structure of the two types of banks.

First, we will review the impact of the new Basel III capital requirements and ratios. In the second section, we will analyze the impact on the risk computation. Section 3 will present the impact of the new buffers. The section 4 will deal with the leverage ratios when the fifth part will be focused on the new liquidity framework.

The last section will be presented as a global conclusion on the capacity of the Islamic banks to face to new Basel III regulation as regard as the conventional financial institutions.


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