By Liliana Rojas Suarez and Thorsten Beck
The 2008 crisis originated in the financial systems of advanced countries. Not surprisingly, one of the important responses to prevent another credit crunch, the Basel III international standards, is focused primarily on the stability needs of these countries. Basel III, a detailed and wide-ranging set of measures developed by a forum of bank regulators representing mainly the G20 nations, aims to strengthen the regulation, supervision and risk management of large banks around the world. While it is calibrated primarily for advanced countries, many emerging markets are in the process of adopting and adapting to these rules. Many others, too, are considering it.
In previous blogs, we have analyzed the potential repercussions of Basel III for emerging markets and developing economies (EMDEs). These blogs focused on potential spillover effects from the implementation of Basel III in advanced countries and possible effects in EMDEs from implementation of Basel III in these countries. As an outcome of intensive discussions among a CGD Task Force, the new Task Force report on Making Basel III Work for EMDEs offers recommendations resulting from this analysis that urge EMDEs to adapt Basel III according to their unique needs and capacities.
Our conceptual framework starts from five specific characteristics of EMDEs that, while not universal, are common enough to not be disregarded. These characteristics include variable access conditions to international capital markets; high macroeconomic and financial volatility; less developed domestic financial markets; limited transparency; and capacity, institutional, and governance challenges. These differentiating factors help explain why the impact of regulatory reforms, such as those under Basel III, is expected to be different in EMDEs than in advanced countries. Our analysis underscores the need for a differentiated approach to bank regulation to make Basel III work in these countries.
Our conceptual framework starts from five specific characteristics of EMDEs that, while not universal, are common enough to not be disregarded. These characteristics include variable access conditions to international capital markets; high macroeconomic and financial volatility; less developed domestic financial markets; limited transparency; and capacity, institutional, and governance challenges. These differentiating factors help explain why the impact of regulatory reforms, such as those under Basel III, is expected to be different in EMDEs than in advanced countries. Our analysis underscores the need for a differentiated approach to bank regulation to make Basel III work in these countries.
In the following, we discuss six of the key Task Force recommendations. These recommendations all refer to specific principles that have guided our analysis.