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A capital accord for emerging economies?

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  • Powell, Andrew

Abstract

The Basel 1988 Capital Accord is arguably the most successful of all recent financial"standards."Although it was designed for internationally active banks in G10 countries, more than 100 countries claim to adhere to it, and many apply the Accord to all banks. Significant changes to this Accord are currently under discussion. The author reviews the current proposals (published in January 2001) from the standpoint of an emerging market. He then addresses how implementation in G10 countries will affect the cost of capital to emerging economies. The new proposals make considerable advances in linking risk and regulatory capital for internationally active banks, especially for their corporate loan book. But the corporate-calibrated internal ratings-based (IRB) approach leads to significant changes in capital requirements and spreads for banks that lend to emerging countries. The author proposes that for sovereign lending, banks should develop internal ratings according to an S&P or Moody's scale, and capital charges be levied at the corresponding weights given by the standardized approach. The author argues that the more detailed and specific the proposals are for G10 internationally active banks, the less relevant the proposals will be for non-G10 countries that wish to implement the new Accord for all banks. Indeed, many emerging countries will implement the'standardized'approach, in which case, given the limited universe of rated risks, little will change. Alternatively, emerging countries will attempt to implement an IRB approach, but with significant problems implementing and calibrating the parameters-or inappropriate use of G10 calibrations. At the same time, banks in emerging economies remain the most important vehicle for financial intermediation and the appropriate regulation of bank capital one of the most important issues for financial sectors. The author suggests that additional alternatives should be included or, failing that, the time may have come specifically for an Accord for emerging economies.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2808.

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Date of creation: 31 Mar 2002
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Handle: RePEc:wbk:wbrwps:2808

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Keywords: Banking Law; Payment Systems&Infrastructure; Financial Crisis Management&Restructuring; Banks&Banking Reform; International Terrorism&Counterterrorism; Banks&Banking Reform; Banking Law; Financial Intermediation; Financial Crisis Management&Restructuring; International Terrorism&Counterterrorism;

References

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  1. Jackson, Patricia & Perraudin, William, 2000. "Regulatory implications of credit risk modelling," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 1-14, January.
  2. Mark Carey, 2000. "Dimensions of Credit Risk and Their Relationship to Economic Capital Requirements," NBER Working Papers 7629, National Bureau of Economic Research, Inc.
  3. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  4. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  5. Mark Carey, 2000. "Dimensions of credit risk and their relationship to economic capital requirements," Finance and Economics Discussion Series 2000-18, Board of Governors of the Federal Reserve System (U.S.).
  6. Barth, James R. & Caprio Jr, Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank.
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Citations

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Cited by:
  1. Stijn Claessens & Geoffrey R D Underhill & Xiaoke Zhang, 2006. "The Political Economy of Global Financial Governance: The Costs of Basle II for Poor Countries," WEF Working Papers 0015, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  2. Liebig, Thilo & Porath, Daniel & di Mauro, Beatrice Weder & Wedow, Michael, 2004. "How will Basel II affect bank lending to emerging markets? An analysis based on German bank level data," Discussion Paper Series 2: Banking and Financial Studies 2004,05, Deutsche Bundesbank, Research Centre.
  3. Rodríguez Dupuy, Analía, 2007. "Loan portfolio loss distribution: Basel II unifactorial approach vs. Non parametric estimations," MPRA Paper 10697, University Library of Munich, Germany.
  4. Chakraborty, Suparna & Allen, Linda, 2007. "Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord," MPRA Paper 1805, University Library of Munich, Germany.
  5. Rojas-Suarez, Liliana, 2002. "Can international capital standards strengthen banks in emerging markets?," Journal of Financial Transformation, Capco Institute, vol. 5, pages 51-63.
  6. 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.
  7. Alicia García-Herrero & Sergio Gavilá, 2006. "Posible impacto de Basilea II en los países emergentes," Banco de Espa�a Occasional Papers 0606, Banco de Espa�a.
  8. Rodriguez, Analía, 2007. "Distribución de pérdidas de la cartera de créditos: el método unifactorial de Basilea II vs. estimaciones no paramétricas," MPRA Paper 12637, University Library of Munich, Germany.
  9. Majnoni, Giovanni & Miller, Margaret & Powell, Andrew, 2004. "Bank capital and loan loss reserves under Basel II - implications for emerging countries," Policy Research Working Paper Series 3437, The World Bank.
  10. Hawkins, John, 2002. "International Bank Lending. Water Flowing Uphill?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Liebig, Thilo & Porath, Daniel & Weder di Mauro, Beatrice & Wedow, Michael, 2005. "Basel II and Bank Lending to Emerging Markets: Micro Evidence from German Banks," CEPR Discussion Papers 5163, C.E.P.R. Discussion Papers.
  12. Griffith-Jones, Stephany & Spratt, Stephen, 2002. "The New Basle Capital Accord and Developing Countries: Issues, Implications and Policy Proposals," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  13. Miguel Angel Segoviano & Philip Lowe, 2002. "Internal ratings, the business cycle, and capital requirements: some evidence from an emerging market economy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  14. Sreejata Banerjee, 2012. "Basel I and Basel II Compliance: Issues for Banks in India," Working Papers 2012-068, Madras School of Economics,Chennai,India.
  15. Arnaud Bourgain & Patrice Pieretti & Skerdilajda Zanaj, 2009. "International Financial competition and bank risk-taking in emerging economies," CREA Discussion Paper Series 09-08, Center for Research in Economic Analysis, University of Luxembourg.
  16. 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.
  17. Liebig, Thilo & Porath, Daniel & Weder, Beatrice & Wedow, Michael, 2007. "Basel II and bank lending to emerging markets: Evidence from the German banking sector," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 401-418, February.
  18. Philip Lowe & Miguel A. Segoviano, 2002. "Internal ratings, the business cycle and capital requirements: some evidence from an emerging market economy," BIS Working Papers 117, Bank for International Settlements.

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