BASEL III GUIDELINES FOR CAPITAL ADEQUACY IN PALAU

The Palauan government has announced plans to implement new Basel III guidelines for capital adequacy in the country’s banking sector. The move is aimed at strengthening financial stability and resilience in the face of growing economic uncertainty.

Key Features of the Proposal

• Applicability: The new guidelines will apply to all banks with total assets exceeding $100 billion or more, as well as those with significant trading activities.
• Risk-based approach: A risk-based approach for setting regulatory capital requirements for credit risk is introduced, which is expected to increase granularity and robustness in the framework.
• Operational risk measurement: Banks will be required to adopt a standardized approach for measuring operational risk, increasing transparency and comparability across the industry.

New Requirements

• Credit Valuation Adjustment (CVA) risk: A new standardized approach for measuring CVA risk is introduced, allowing banks to recognize hedges for expected exposure component of CVA risk.
• Market risk sensitivity: Value-at-Risk (VaR) will be replaced with Expected Shortfall (ES) as the primary measure under the Internal Model Approach.

Implementation Timeline

• Public comment period: The proposal includes a public comment period, which ends on November 30, 2023.
• Transition period: A three-year transition period for compliance is proposed, with a compliance date of July 1, 2025.

Benefits of Implementation

The implementation of Basel III guidelines in Palau is expected to bring greater consistency and transparency in the country’s banking sector, ultimately enhancing financial stability and resilience in the face of economic uncertainty.