Basel II and
Emerging Markets
The Future of Banking Regulation
London School of Economics
April 7–8, 2005
Hung Q. Tran
Deputy Director
International Capital Markets Department
DOC# 2419379 v1
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Contents
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IMF Staff View on Basel II
Concerns Raised by Emerging Market
Countries (EMCs)
Basel II and EMC Bank Supervisors
Basel II and Banks in EMCs
Basel II and Borrowers in EMCs
Basel II and Capital Flows to EMCs
The Role of the IMF
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1. IMF Staff View on Basel II
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Basel II represents a significant improvement over the
1988 Capital Accord (Basel I).
Its implementation should enhance financial stability—
especially thanks to its focus on risk management.
Wide consultative process appreciated.
2007 implementation date should not take precedence
over implementation quality in emerging market
countries (EMCs).
Supervisory review process is key to successful
implementation.
Better implementation of Basel Core Principles (BCP) an
essential precondition for successful adoption.
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2. Concerns raised by Emerging
Market Countries (EMCs)
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Complexity of rules.
Discretion of time frame.
Concerns that smaller/domestic banks may be put in a
competitive disadvantage.
Weak regulatory framework and lack of resources,
leading countries to remain on Basel I.
Unfavorable assessments by international financial
institutions and international market participants.
Increase in EMC banks’ capital.
Reduced capital flows to EMCs.
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3. Basel II and EMC Bank Supervisors
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Bank supervisors have to choose an appropriate regime:
premature adoption of Basel II could create problems,
not solutions.
For many countries, improving compliance with BCP is a
greater and more immediate priority—staying on Basel I
over near-term may be a more appropriate option.
Identify and monitor competitive implications of chosen
approach—while staying on Basel I, leverage interest in
Basel II to initiate needed reforms in banking
supervision, risk management, and disclosure.
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3. (cont.) Basel II and EMC Bank
Supervisors
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Develop implementation strategy and road map—2007 is
intended for BCBS members; EMC supervisors should
be guided by status of their own systems and set
timetable accordingly.
Build supervisory capacity—recruit and retain qualified
staff (huge challenge for supervisors worldwide).
Agree on home-host supervisory coordination—
understand what international banks are doing in your
home market.
Facilitate development of common infrastructure,
including regional initiatives.
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4. Basel II and Banks in EMCs
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Need to strengthen risk management systems—a key
competitive tool for banks.
Assess effect on capital—prepare action plans for meeting
minimum requirements.
Anticipate shifts in industry practice and lending behavior.
Seek shared solutions.
Find the right people and keep them.
Local affiliates of international banks: national treatment will
likely lead to multiple capital regimes throughout the world.
Large domestic banks active internationally: will need to deal
with competitive problems if home country stays on Basel I,
credibility issues if home country moves to Basel II.
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5. Basel II and Borrowers in EMCs
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Basel II and its focus on risk management and
risk-sensitive pricing of credit could result in
lower borrowing costs for low-risk
clients/sectors.
Higher-risk borrowers could face rising costs,
leading to greater recourse to collateral and
credit enhancement.
Impetus for developing credit risk mitigation and
transfer products.
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6. Basel II and Capital Flows to EMCs
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Many major international banks have used
economic capital models to price EM credits—
unlikely to make many changes under Basel II.
Smaller banks, however, may be more influenced by
the cost of regulatory capital—Basel II may lead to
more risk-sensitive pricing of EM credit.
Impact of Basel II on procyclicality of capital flows
remains to be seen. However, requirements of IRB
calculations of risk parameters over a credit cycle
may mitigate the procyclicality risk.
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7. Role of the IMF
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Basel II is important to the IMF’s mandate to promote financial
stability.
The choice of the capital regime is a decision for national
authorities.
Assessment of capital regimes is but one component of the
BCP assessment under FSAP—World Bank/IMF will not
assess compliance based on whether or not a country has
implemented Basel II.
The IMF places more importance on improving supervision and
regulation overall (BCP) than on the choice of any particular
capital regime.
The IMF stands ready to provide technical assistance (TA),
along with other TA providers, to lay the foundation for Basel II.
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