BIS: Challenges of the Basel framework for emerging market, developing and small economies
14 November 2014
This paper assesses the potential impact and implementation challenges and outlines practical steps that can be taken by authorities to implement global standards.
The Financial Stability Board (FSB), in collaboration with standard-setting bodies (SSBs) and international financial institutions (IFIs), has been monitoring the effects of regulatory reforms on emerging markets and developing economies (EMDEs). Following the study by the FSB and IFIs in June 2012, and while fully supporting the implementation of the agreed regulatory reforms to achieve a safer financial system, the G20 encouraged the FSB (in coordination with SSBs, IFIs and national authorities) to continue assessing the potential unintended consequences on EMDEs and providing policy advice to mitigate them.
An update of the 2012 study was published by the FSB in September 2013. The main takeaways of this report were:
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EMDEs continue to indicate that several regulatory reforms could have potential adverse implications. These include Basel III capital and liquidity requirements, OTC derivative market reforms, policy measures for G-SIFIs, and structural reform initiatives. Many of these reforms are in the initial stages of implementation and their full impact on EMDEs is yet to be seen
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EMDEs continue to be concerned about deleveraging by internationally active banks. That said, differences in macroeconomic conditions and the relative health of home country banking systems are reported to have been the main drivers of differences in foreign bank lending to EMDEs. There are also concerns about potential impact on the liquidity of EMDEs domestic sovereign bond markets
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EMDEs are particularly concerned about the Basel III liquidity standards. Many banks in EMDEs are expected to meet the minimum capital requirements. However, the Basel III liquidity framework is expected to lead to implementation challenges for EMDEs due to the limited availability of high quality liquid assets and difficulties in calibrating the framework to suit practices of smaller banks and small jurisdictions
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The implementation of reforms in EMDEs needs to be sequenced taking into account several factors. These include: (i) a dequacy of supervisory resources; (ii) the need for intensive cross-border cooperation and information sharing to avoid potential inconsistencies in national initiatives (such as the structural constraints imposed on bank business models), and (iii) the needs and the structure of the EMDEs financial systems. Indeed, give n that the structure and characteristics of financial systems across EMDEs are very diverse, some aspects of the new standards are not necessarily applicable nor a priority for many EMDEs
IFIs and the Basel Committee on Banking Supervision (BCBS) are increasingly focusing on the implementation of Basel III reforms. IFIs continue developing additional guidance and identifying good practices of reform implementation for EMDEs, monitoring these issues in the context of their surveillance work, and providing technical assistance to evaluate the adequacy and sequencing of the regulatory reforms. The Basel Committee is monitoring the timely adoption of Basel III standards, its quantitative impact on banks and the consistency of implementation among its members.
The BCBS also expanded its outreach and consultation across jurisdictions on the impact of Basel III, and the Basel framework more generally. The Basel Consultative Group (BCG), the main outreach group of the BCBS, established a work stream to identify the impact of BCBS standards implementation on emerging market, developing and small Economies (“EMDEs and small economies”).
This report presents the findings and recommendations of the BCG. Broadly, the BCG would like to highlight the increasing importance of defining an “internationally active bank” as being the primary target of implementation of reforms. This is particularly important given the complexity of reforms and the reinforcement of the proportionality concept in the 2012 Basel´Core Principles.
Full working paper
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