Banking in Pakistan: State Bank of Pakistan

The State Bank of Pakistan (SBP) (Urdu: بینک دولت پاکستان) is the central bank of Pakistan. While its constitution, as originally laid down in the State Bank of Pakistan Order 1948, remained basically unchanged until January 1, 1974, when the bank was nationalized, the scope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of its operations today. The headquarters are located in the financial capital of Pakistan, Karachi with its second headquarters in the capital, Islamabad.

History

Before independence on 14 August 1947, the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan. On 30 December 1948 the British Government's commission distributed the Bank of India's reserves between Pakistan and India - 30 percent (750 M gold) for Pakistan and 70 percent for India.

The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948.

[1] FUNCTION

Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged with the duty to "regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage".

A large section of the state bank's duties were widened when the State Bank of Pakistan Act 1956 was introduced. It required the state bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilisation of the country’s productive resources". In February 1994, the State Bank was given full autonomy, during the financial sector reforms.

On January 21, 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997). Those included were the State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalisation Act, 1974. These changes gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan. The amendments to the Banks Nationalisation Act brought the end of the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives, Boards of the Nationalised Commercial Banks (NCBs) and Development Finance Institutions (DFIs). The State Bank having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the chief executives, the Boards of Directors of banks and DFIs.

The State Bank of Pakistan also performs both the traditional and developmental functions to achieve macroeconomic goals. The traditional functions, may be classified into two groups:

  1. The primary functions including issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conduct of monetary policy.
  2. The secondary functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions.

The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalisation of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of islamisation of the banking system.

Regulation of liquidity

The State Bank of Pakistan has also been entrusted with the responsibility to carry out monetary and credit policy in accordance with Government targets for growth and inflation with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives.

The state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management. During the 1980s, Pakistan embarked upon a program of financial sector reforms, which lead to a number of fundamental changes. Due to these changed the conduct of monetary management which brought about changes to the administrative controls and quantitative restrictions to market based monetary management. A reserve money management programme has been developed, for intermediate target of M2, that would be achieved by observing the desired path of reserve money - the operating target.

State Bank of Pakistan has changed the format and designs of many bank notes which are currently in circulation in Pakistan. These steps were taken to overcome the problems of fraudulent activities.

Banking

The State Bank of Pakistan looks into a lot of different ranges of banking to deal with the changes in economic climate and different purchasing and buying powers. Here are some of the banking areas that the state bank looks into;

  • State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Financing
  • Procudure For Submitting Claims With Sbp In Respect of Unclaimed Deposits Surrendered By Banks/Dfis.
  • Banking Sector Supervision in Pakistan
  • Micro Finance
  • Small Medium Enterprises (SMEs)
  • Minimum Capital Requirements for Banks
  • Remittance Facilities in Pakistan
  • Opening of Foreign Currency Accounts with Banks in Pakistan under new scheme.
  • Handbok of Corporate Governance
  • Guidelines on Risk Management
  • Guidelines on Commercial Paper
  • Guidelines on Securitization
  • SBP.Scheme for Agricultural Financing

Bank Assets and Liabilities

This is a chart of trend of major assets and liabilities reported by scheduled commercial banks to the State Bank of Pakistan with figures in millions of Pakistani Rupees.[1][2][3]

Year Deposits Advances Investments
2002 1,466,019 932,059 559,542
2006 2,806,645 2,189,368 799,285

Departments

  • Agricultural Credit
  • Audit
  • Banking Inspection
  • Banking Policy
  • Banking Supervision
  • Corporate Services
  • Economic Analysis
  • Monetary Policy
  • Research
  • Statistics and Dataware House
  • Exchange and Debt Management
  • Exchange Policy
  • Human Resource
  • Information System
  • Islamic Banking
  • Legal Services
  • Library
  • Payment System
  • Real Time Gross Settlement System (RTGS System)
  • Small and Medium Enterprises
  • Training and Development Department (TDD)

Governor

The principal officer of the SBP is the Governor. The current Governor of State Bank of Pakistan is Syed Salim Raza who took over from Dr. Shamshad in January 2009 for a three year term. He is a retired professional from Citibank and was the Chairman of Pakistan Business Council. See his profile

Central Board of Directors

  1. Syed Salim Raza Chairman
  2. The Secretary Finance Member
  3. Mr. Khair Mohamed Junejo Member
  4. Mr. Ehsen Rashid
  5. Mr. M. Yaqoob Vardag Member
  6. Mr. Mohsin Aziz Member
  7. Dr. Wasim Azhar Member
  8. Mr. Kamran Y. Mirza Member
  9. Mr. Alman A. Aslam Member
  10. Mr. Riaz Ahmed Secretary

Trivia

Old Five hundred rupee note featuring the State Bank's premises in Islamabad
  • An image of the Islamabad branch appears on the former five-hundred-rupee banknote.

See also

References

  1. ^ state bank of pakistan and central bank

1. State Bank of Pakistan Evolution, Functions and Organization by M Farooq Arby

External links

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Basel II Accord

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

The final version aims at:

  1. Ensuring that capital allocation is more risk sensitive;
  2. Separating operational risk from credit risk, and quantifying both;
  3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.

The Accord in operation

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline – to promote greater stability in the financial system.

The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach".

For operational risk, there are three different approaches - basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA.

For market risk the preferred approach is VaR (value at risk).

As the Basel 2 recommendations are phased in by the banking industry it will move from standardized requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital.

Credit Risk can be calculated by using one of three approaches

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as capital) remains at 8%.

For those Banks that decide to adopt the standardised ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result.

The second pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system.

The third pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately.

September 2005 update


On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) announced their revised plans for the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months.[1]

November 2005 update

On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005.[2]

July 2006 update

On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version.[3]

November 2007 update

On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks.[4]

July 16, 2008 update

On July 16, 2008 The federal banking and thrift agencies ( The Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; the Office of the Comptroller of the Currency, and; the Office of Thrift Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to the supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the advanced approaches rule, which took effect on April 1, 2008. [5]

Basel II and the regulators

One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural models, and the complexities of public policy and existing regulation. Banks’ senior management will determine corporate strategy, as well as the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators.

To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several software applications available. These include capital calculation engines and extend to automated reporting solutions which include the reports required under COREP/FINREP.

For example, U.S. FDIC Chairman Sheila Bair criticized the Basel II standards during June 2007: "There are strong reasons for believing that banks left to their own devices would maintain less capital -- not more -- than would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real … as we saw with the U.S. banking and S & L crisis in the late 1980s and 1990s. The final bill for inadequate capital regulation can be very heavy. In short, regulators can't leave capital decisions totally to the banks. We wouldn't be doing our jobs or serving the public interest if we did.[6]

Implementation progress

Regulators in most jurisdictions around the world plan to implement the new Accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States of America's various regulators have agreed on a final approach.[7] They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will not be available to anyone.(See http://www.federalreserve.gov/newsevents/press/bcreg/20080626b.htm for an update on proposed Standardized Approach)

In India, RBI has implemented the Basel II standardized norms on 31st march 2009 and is moving to Internal ratings in credit and AMA norms fr operational risks in banks.

In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national regulators indicated they were to implement Basel II, in some form or another, by 2015.[8]

The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already report their capital adequacy ratios according to the new system. All the credit institutions will adopt it by 2008.

Australia, through its Australian Prudential Regulation Authority, implemented the Basel II Framework on 1 January 2008[9].

References
  1. ^ Federal Reserve
  2. ^ BIS
  3. ^ BIS
  4. ^ OCC
  5. ^ OCC
  6. ^ Shelia Bair Speech
  7. ^ OCC Notice of Proposed Rulemaking
  8. ^ BIS
  9. ^ Information Paper: Implementation of the Basel II Capital Framework

External links

Other links

Euro jumps against dollar

The euro jumped against the dollar Monday on robust stock market gains that emboldened investors to take positions in currencies considered riskier than the greenback.
The euro in late-day trade was at 1.4217 dollars against 1.4096 late Friday in New York.
The dollar was meanwhile trading at 94.49 yen, up from 94.17 on Friday.
"The US dollar is trading with a weaker tone as equity markets continue to gain ground," said analyst Audrey Childe-Freeman of Brown Brothers Harriman.
At BNP Paribas bank analysts said in a note that "optimism regarding the recovery process has continued to increase, with reports globally suggesting that the worst is over and providing support for the asset market as well as allowing currencies to extend their rebound against the dollar and the yen."
The prevailing optimism encouraged investors to venture out of the dollar and yen and into currencies, such as the euro, seen as carrying greater risk. Trading sentiment got a boost Monday from reports that a rescue deal with creditors had been reached for CIT, a US lender to small- and mid-sized businesses, helping ease concerns that the recovering financial sector could face a fresh setback.
Still in the United States, the Conference Board economic survey for June was up 0.7 percent, a third straight monthly increase and above forecasts for a 0.5 percent gain, helping to strengthen hopes for an end to the long recession.
In further upbeat reports, the German finance ministry and central bank said the country's worst recession since World War II had lost much of its intensity.
After a disastrous first quarter, "the recessionary trend has clearly weakened" in Europe's biggest economy, the Bundesbank central bank said.
Economic activity "should have fallen only slightly" after a record contraction of 3.8 percent in the first three months of the year from the previous quarter, it added.
Finance ministry officials agreed, saying: "Available economic data support the hypothesis that second quarter economic activity was undoubtedly better than expected."
The currency market is now turning its attention to Congressional testimony Tuesday and Wednesday from US Federal Reserve Chairman Ben Bernanke.
"The financial markets will want to know how optimistic the (Fed policymakers) have become since the data began improving and what this means for the policy of quantitative easing," said Derek Halpenny of Bank of Tokyo-Mitsubishi
Quantitative easing is a process by which central banks such as the Fed, having reduced interest rates to near zero, turn to measures to increase the money supply in order to relieve a credit squeeze.
In trading here on Monday, the euro was changing hands at 1.4217 dollars against 1.4096 dollars late on Friday, 134.19 yen (132.84), 0.8628 pounds (0.8630) and 1.5202 Swiss francs (1.5181).
The dollar stood at 94.49 yen (94.17) and 1.0704 Swiss francs (1.0761).
The pound was at 1.6460 dollars (1.6333).
On the London Bullion Market, the price of gold rose to 952.75 dollars an ounce from 937.50 dollars an ounce late on Friday.
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