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Reforming Bank Capital Requirements: Implications of Basel II for Latin American Countries

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  • Giovanni Majnoni

    ()

  • Andrew Powell

    ()

Abstract

The controversial proposal to overhaul the international accord regarding the regulation of bank capital was completed in 2004, and the thirteen Basel Committee member countries are set to implement the new accord, known as Basel II, by 2007. We develop a Basel II decision tree to guide policymakers facing the issue of whether to adopt the new accord. We also estimate credit risk in banks across three Latin American countries using a homogeneous methodology. Our findings suggest that Latin America falls between the two main Basel II alternatives. Non-G10 countries may thus wish to recalibrate Basel II's internal ratings-based (IRB) approach. Alternatively, we propose an intermediate centralized ratings-based (CRB) approach. We argue that the CRB approach may be made compatible with Basel II by developing an integrated policy for provisions and capital. We perceive a danger that Basel II may be adopted too quickly or inappropriately and may then represent the end of a standard rather than the establishment of a new one. We suggest that a Basel II-compatible CRB approach with homogeneous definitions would enhance true comparability.

Suggested Citation

  • Giovanni Majnoni & Andrew Powell, 2005. "Reforming Bank Capital Requirements: Implications of Basel II for Latin American Countries," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 105-149, January.
  • Handle: RePEc:col:000425:008663
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    Cited by:

    1. repec:eee:spacre:v:17:y:2014:i:1:p:58-70 is not listed on IDEAS
    2. Carvallo, Oscar & Kasman, Adnan & Kontbay-Busun, Sine, 2015. "The Latin American bank capital buffers and business cycle: Are they pro-cyclical?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 148-160.
    3. Knedlik, Tobias & Ströbel, Johannes, 2006. "The role of banking portfolios in the transmission from currency crises to banking crises - potential effects of Basel II," IWH Discussion Papers 21/2006, Halle Institute for Economic Research (IWH).
    4. Ricardo N. Bebczuk, 2007. "Loans Size and Portfolio Loss Predictability in Argentina," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(49), pages 139-155, October -.
    5. Adasme, Osvaldo & Majnoni, Giovanni & Uribe, Myriam, 2006. "Access and risk - friends or foes? Lessons from Chile," Policy Research Working Paper Series 4003, The World Bank.

    More about this item

    Keywords

    Bank regulation; solvency ratios; loan loss reserves; emerging economies;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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