Reform Phase II

Phase II: Banking Supervision Reform

Basel II Implementation project

In January 2009 CBE initiated the second wave of its reform program scheduled to end by 2011 (extend up to 31 March 2012) , the main Pillars of the program are:

    • Supervise and monitor the launch of a complete operational and financial restructuring plan for the three state owned specialized banks (The Principal Bank for Development and Agricultural Credit , Egyptian Arab Land Bank,and Industrial Development & Workers Bank of Egypt).
    • Follow up on the operational and institutional restructuring of ( National Bank Egypt, Banque Misr and Banque Du Caire ) to ensure sustainability of phase I restructuring achievements and finalizing the requirements necessary to improve their efficiency infinancial intermediation and risk management.
    • Adopting an initiative promoting the development and growth of banking activities/services catering for various sectors especially the SME sector
    • Review and enforce the implementation of Corporate Governance rules in the banking sector and the Central Bank of Egypt
    • Implementation of the Basel II accord by Egyptian banking sector.

      Program Preparation:

      • In 2008, a series of meetings regarding Basel II were held between CBE, European Central Bank (ECB), several European National Banks, a sample of Egyptian Banks, Capital Market Authority, Egyptian Legal and external Audit firms, Egyptian Banking Association, and the Egyptian Banking Institute to discuss details of the implementation plan for Basel II in the Egyptian Banking Sector.
      • Basel II Program Memorandum of understanding (MOU) was signed in November 26th, 2008 between CBE & European Central Bank (ECB); in cooperation with seven European National Central Banks (NCBs) namely; Bulgarian National Bank, Czech National Bank, Deutsche Bundesbank, Bank of Greece, Banque de France, Bancad'Italia, and National Bank of Romania. The Program duration is three years started in January 2009 ending December 2011. Theprogram was extended in March 2011 by three months to end in March 2012 due to ; available extra resources, approving new activities in January 2011 for all of Banking Supervision departments to aid in the implementation phase, and the freezing of EU experts' missions for two months(February and March 2011) due to the Egyptian revolution.
      • Identified the project owner, and a dedicated task force has been set up inside the CBE to manage all aspects leading to the implementation of Basel II framework. The full time dedicated team consists of a mix of different skills and experiences to increase the team’s ability to address all issues. Also, an EU resident project coordinator from Banque de France joined the program.

      The Implementation program was set according to the following time lined plan:

        Phase I (January 2009- June 2009, 6 months)
        • Capacity building of the specialized task force and banking supervision executives on Basel II issues. Where a series of missions & study visits where conducted by NCBs EU experts concentrated on certain agreed upon Basel II topics.
        • Inner reflection on the identification of stakeholders in the program. Accordingly, a detailed stakeholder's database was prepared covering all required contacts.
        • Issuance of CBE Basel II Strategy. CBE has issued its strategy for implementing Basel IIto the Egyptian Banking system & all stakeholders. The strategy depends on two main principals;Simplicity & Communication, and the implementation technique will be standardized approach and its related issues for credit and market risks, and basic indicator for operational risk. H.E.Dr. El-Okda has discussed the CBE Basel II strategy in October 2009 in an open meeting dedicated for that purpose with all chairmen, risk management heads of all the banks operating in Egypt, and all stakeholders.

        Phase I was successfully finalized by delivering all required deliverables &all agreed upon missions.

        Phase II (July 2009 – June 2011, 24 months):
        • Intense coordination with the banking system based on discussion papers to be issued on the most significant topics. Basel II core team worked through a series of missions with the EU experts on finalizing four Discussion Papers on Pillar I (Own Fund, Credit, Market, & Operational Risks)and they were disseminated to the 39 banks operating in Egypt. A meeting was headed by Mr. Gamal Negm – the Deputy Governor, with all chairmen, CROs, & CFOs of all the banks operating in Egypt in April 2010 to discuss the mechanism of managing the discussion papers with the banks. Basel II Core Team analyzed all feedback from the banks. (questions, inquiries, & suggestions) and narrowed down topics for discussion under 9 – 12 main topics for each paper. Identified Working Groups of around 10 - 12 banks from the system according to a certain criteria. Four meetings where conducted with the working groups covering the above mentioned four topics. The same process was applied on pillar two risks, namely; Liquidity, Interest Rate Banking Book risks as both discussion papers were disseminated to the market in March 2011; as for Concentration Risk, and Internal control were disseminated in May 2011.
        • Quantitative impact studies (QIS) to assess the consequences of future Basel II regulations prior to their legal enforcement in terms of risk management techniques and capital ratios. The results of the discussions were used by the core team & EU experts to prepare the Quantitative Impact Study(s) that were disseminated to all banks in the system during December 2010. The second wave of QIS covered Pillar two risks which disseminated to the banks on the second quarter of 2011. As for internal control, it was treated differently in terms of QIS as it was replaced by onsite inspection targeted missions due to the non-quantitative nature of the topic. The results of the discussion papers (qualitative) & QIS (quantitative) were used as guidelines for drafting required regulations that covered all identified topics on phase III.
        • Set up of a new data-warehousing framework to enhance data collection and reduce the number of regulatory reports. The types of reported data will also be amended to remain consistent with future regulatory framework. A separate team 2 from offsite, Basel II core team, & IT; along with EU experts has started working on the Data Reporting issues. A preliminary plan has been issued by the team during the first quarter of 2010, and thedetailed time line plan was finalized by 2010 end.However physical work has started since November 2009.
        • Sufficient and adequate additional capacity building and training for both CBE and Egyptian banks’ staff. This phase is considered an on job capacity building for all involved stakeholders, as they learn from the EU experts while drafting preparing discussion papers & QISs. Also, learning about the details of the Egyptian market through analyzing feedback from banks on discussion papers & QIS.
        • Implementation issues activity.As previously mentioned, in January 2011 the Steering Committee of the Basel II implementation program has approved a new activity to the program which is to enhance the capabilities of all departments in CBE's Banking Supervision Sector regarding Basel II implementation phase. The activities covered the following:
          -Supervisory Review Evaluation Process (SREP) which will be dedicated to both On & Off site departments.

          -Onsite assessment of Basel II.

          -Monitoring of new Basel II reports (Offsite department).

          -Incorporation of Basel II in licensing criteria.

          -Identifying the systemic risk in Basel II environment (Macro prudential Unit).

          -Managing international relations (Basel Unit).

          -Optimizing the credit data collection for Basel II supervisory purposes(Central Credit Registry).

        The previously mentioned activities took place during phase II & III of the program and in parallel to its original activities.

        Finally, this phase was considered as the backbone phase for the project

        Phase III (July 2011 – December 2011, 6 months):(Extended by three months as previously mentioned under the introduction.

        • Finalized the fine tuning of the regulations.
        • Banks’ preparation for Basel II implementation along with corrective time lined actions with varying duration plans for some banks, dependent on the results of the simulation.
        • Implementation issues activity.
        Phase IV (Ongoing):
        • Parallel run of existing regulations on capital adequacy and Basel II.
        • Finalize the data warehousing framework.

        It has been decided that banks will be required to apply Basel II pillar I regulations starting from December 2012 & June 2013 according to the end of the financial year of each bank.