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Can international capital standards strengthen banks in emerging markets?

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Abstract

This paper deals with the appropriate design of capital adequacy requirements in emerging markets. It divides countries in two groups according to their capacity to enforce regulatory capital. The first group is characterized by an inappropriate accounting standards and reporting systems, improper classification of non-performing loans and deficient legal and judicial frameworks, and high concentration of asset ownership. It is shown that under these conditions, capital ratios can not perform their supervisory role of containing excessive risk-taking activities by banks. The sustainable policy for these countries consists of removing the constraints to the effectiveness of capital standards; however, those policy reforms often take a significant amount of time. During the transition period, it is essential to identify and develop indicators of banking problems that reveal the true riskiness of banks. Recommendations for policymakers, therefore, focus on strengthening the role of market discipline to substitute for the inadequacies of the regulatory capital requirements. In the second group of countries, a continuous increase in the participation of foreign banks from industrial countries is de facto reducing the degree of related-lending activities. The combination of competition induced by the entry of new providers of wealth and improved accounting, regulatory, and supervisory frameworks can contribute towards increasing the usefulness of capitalization ratios. The main recommendation for this group is to design a capital standard that appropriately reflects the risk of banks' assets. The standard should have two basic components. The first is the development of risk-based regulations in loan-loss provisions. The second is the establishment of a reduced number of risk categories to classify assets, with the central qualification being that the categories of risk should reflect the particular features of banks’ assets in emerging markets. Issues that need to be considered include an adequate risk assessment of government paper and the introduction of distinct capital charges for borrowers in the tradable and non-tradable sectors.

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Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 5 (2002)
Issue (Month): ()
Pages: 51-63

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Handle: RePEc:ris:jofitr:1291

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Keywords: Capital adequacy requirements; emerging markets;

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References

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  1. Powell, Andrew, 2002. "A capital accord for emerging economies?," Policy Research Working Paper Series 2808, The World Bank.
  2. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1995. "Financial Fragilities in Latin America: The 1980s and 1990s," IMF Occasional Papers 132, International Monetary Fund.
  3. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  4. Michael Gavin & Ricardo Hausmann, 1997. "Make or Buy? Approaches to Financial Market Integration," Research Department Publications 4052, Inter-American Development Bank, Research Department.
  5. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications 5819, Inter-American Development Bank.
  6. repec:fth:inadeb:318 is not listed on IDEAS
  7. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  8. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.
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Cited by:
  1. Benu Schneider, 2005. "Do Global Standards And Codes Prevent Financial Crises? Some Proposals On Modifying The Standards-Based Approach," UNCTAD Discussion Papers 177, United Nations Conference on Trade and Development.
  2. Ocampo, Jose Antonio, 2002. "Capital-Account and Counter-Cyclical Prudential Regulations in Developing Countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Saadaoui, Zied, 2009. "Fonds propres réglementaires et stabilité bancaire dans les pays émergents
    [Capital Requirements and Banking Stability in Emerging Countries]
    ," MPRA Paper 25217, University Library of Munich, Germany.
  4. Christophe Godlewski, 2004. "Capital Regulation and Credit Risk Taking : Empirical Evidence from Banks in Emerging Market Economies," Finance 0409030, EconWPA.
  5. Guidotti, Pablo E. & Rojas-Suarez, Liliana & Zahler, Roberto, 2004. "Designing financial regulatory policies that work for Latin America: the role of markets and institutions: Views from the Latin American Shadow Financial Regulatory Committee," Journal of Financial Stability, Elsevier, vol. 1(2), pages 199-228, December.
  6. Saadaoui, Zied, 2008. "Capital standards and banking stability in emerging countries: an empirical approach," MPRA Paper 25464, University Library of Munich, Germany.
  7. Nachane, D M & Ray, Partha & Ghosh, Saibal, 2005. "The new Basel capital accord: Rationale, design and tentative implications for India," MPRA Paper 17426, University Library of Munich, Germany.
  8. Christophe Godlewski, 2004. "Are Bank Ratings Coherent with Bank Default Probabilities in Emerging Market Economies ?," Finance 0409023, EconWPA.
  9. Iustina Boitan, 2012. "Development of an Early Warning System for Evaluating the Credit Portfolio´s Quality. A Case Study on Romania," Prague Economic Papers, University of Economics, Prague, vol. 2012(3), pages 347-362.
  10. Mario Tonveronachi, 2009. "Implications of Basel II for financial stability. Clouds are darker for developing countries," PSL Quarterly Review, Economia civile, vol. 62(248-251), pages 117-142.
  11. Daoud Barkat Daoud, 2003. "Quelle réglementation du capital bancaire pour les pays en développement ?," Revue d'Économie Financière, Programme National Persée, vol. 73(4), pages 311-323.
  12. Nachane, D M & Ray, Partha & Ghosh, Saibal, 2004. "The New Basel Capital Accord: A Primer with an Indian Focus," MPRA Paper 17397, University Library of Munich, Germany.
  13. Maria Abascal & Luis Carranza & Mayte Ledo & Arnoldo Lopez Marmolejo, 2011. "Impact of Financial Regulation on Emerging Countries," Working Papers 1108, BBVA Bank, Economic Research Department.

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