Capital Adequacy of Banks in North Cyprus from EU CRD IV Perspective

ABSTRACT: The global debt crisis in 2007-2008 turned out to a Eurozone debt crisis in late 2009 and its effects are still on-going. The crisis caused authorities to recognise that in a global financial market with free and dynamic financial mobility it is harder to regulate and supervise the financial markets and institutions. This triggered regulators and supervisors around the world to make step to improve Basel II to Basel III in 2010. Being an active participant in this process EU adopted her own legislation and introduced CRD IV package which is also called Single Rulebook and Single Supervisory Mechanism in 2013. Apparently the aim is harmonisation of the legislation and supervision practices across the union. With her unique political status, North Cyprus is a country where EU legislation will be applied after the Cyprus conflict is solved. This paper aims to analyse the capital adequacy of North Cyprus banking sector in terms compatibility of Own Funds to the latest changes in EU legislation with a final target to unveil the necessary steps to elevate capital composition of the banks in North Cyprus to the level of CRDIV of European Union. To achieve these goals CRDIV package formed from Directive 2013/36/EU and accompanying Capital Requirements Regulation (CRR) (REGULATION (EU) No 575/2013) and North Cyprus’ Regulation about the Procedures and Principles for the Evaluation of Banks’ Capital Adequacy under Bank Law numbered 39/2001 were compared item by item in terms of Own Funds calculation. The comparison revealed that with present regulation and current market conditions North Cyprus Banks will not have problems in terms of capital adequacy in adapting EU criteria. Their Own Funds meet the conditions of Regulation (EU) 575/2013 by means of Common Equity Tier 1 Capital. This consequence has several reasons but the main reason is the absence of complicated capital instruments and the institutions’ capitals’ being mostly composed of paid up capital. It is observed that Regulation (EU) 575/2013 spends too much energy on cleaning out capital instruments funded through subsidiaries by the institution itself. With uncomplicated capital instruments it is easier for the supervisor to detect cross holdings. This brings us to the point that the capital instruments should be in their simplest form to be used as common equity for financial institutions for a better supervised and functioning financial sector and institutions. On the other hand it is inevitable to update North Cyprus regulation according to the Basel III criteria and CRD IV package of EU. For now some missing items in current regulations have insignificant effects due to current market conditions as in the case of capital instruments or practices as in the case of Defined Pension Fund Assets. The regulations on consolidated reporting standards and consolidated supervision of institutions and their affiliates seems most urgent topic to be updated in compliance with the IFRS rules. Keywords: Basel III, CRD IV, Capital Adequacy Ratio, Own Funds, Tier 1 Capital. …………………………………………………………………………………………………………………………