The Central Bank of Belize, in conjunction with the banks, is revising the existing capital framework to enhance the resilience and stability of the financial system. The revised capital framework promises to enhance risk management practices in banks, which will promote forward-looking risk assessments and the alignment of capital requirements with banks’ underlying risks. The framework will be implemented in three phases in accordance with the Pillars of the Basel Accords. The Central Bank has established a working group, inclusive of representatives from the banks, to facilitate consultations, discussions and agreements on issues relating to the implementation of the revised capital framework.
Implementation Roadmap
In accordance with the Central Bank’s mandate to regulate financial institutions conferred on it by Section 7 of the Domestic Banks and Financial Institutions Act 2012 (DBFIA) and Section 18 of the International Banking Act (IBA), the Central Bank of Belize is revising the existing capital framework to enhance the resilience and stability of the financial system.
This phase corresponds to Pillar 1 of the Basel Accords, which relates to the calculation of minimum capital requirements based on the quantification of credit, market and operational risks. Capital has been tiered into three levels and a minimum percentage has been established for each tier level that is included in the computation of the capital adequacy ratio. As it pertains to the risk-weighted assets, the denominator for the capital adequacy ratio, Basel II takes into account the credit rating assigned to an asset in determining its risk category by assigning lower risk profiles to assets that receive higher credit ratings.
The first phase commenced in November 2018 and was completed in December 2020.
This phase complements the minimum regulatory requirements of Pillar 1 focusing on the Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP).
Prior to the banks being required to submit their ICAAP reports, the Central Bank issued various risk management guidelines that will form the foundation of these annual reports. The guidelines established the minimum expectations for the management of credit risk, operational risk, interest rate risk in the banking book, stress testing, and liquidity requirements. For its part, the Central Bank will execute the SREP requirements in the delivery of its mandate to promote a sound financial system.
Due to the onset of the pandemic, phase two was delayed and officially launched in October 2020 with an expected implementation time of August 2023.
The final pillar reinforces the minimum capital requirements and supervisory review process by requiring additional disclosure requirements to impose market discipline on financial institutions. Pillar III imposes strong incentives on banks to conduct their business in a safe, sound and efficient manner given the additional disclosures which allow market participants to assess the financial soundness of banks operating in Belize.
The third phase of the project is scheduled to commence in June 2023. At the completion of the third pillar, the revision of the capital framework would have been completed allowing banks to assess their capital levels under the qualitative and prescriptive requirements of Pillar 1 and the additional assessments stipulated in the Supervisory Review Process.
Implementation Documents
Pillar 1: Minimum Capital Requirements
This document, Basel II/III Capital Framework issued 31 January 2020 outlines the overall framework for the calculation of minimum capital requirements and constituents of capital as adopted by the Central Bank of Belize based on the Basel Capital Framework as developed by the Basel Committee on Banking Supervision. The Central Bank aims to ensure that all banks maintain a level of capital that is consistent with the risks arising from their operations.
Pillar 2: Supervisory Review Process
The following documents establish the Central Bank’s minimum expectations for risk management by banks operating in Belize. These risk management principles will be foundational to banks reporting their Internal Capital Adequacy Assessment Process reports by December 2022.